Salmond has questions to answer, because the evidence doesn’t support him

William Bain lays out the evidence against a financially viable independent Scotland


William Bain MP (Labour, Glasgow North East) is the shadow Scotland Office minister and a contributor to “What Next for Labour: Ideas for a New Generation” (Queensferry, 2011)

Economic storm-clouds are gathering across the EU, and the impact of the downturn is being felt deeply in Scotland, with female unemployment up 25 per cent in the last quarter, amid soaring levels of child poverty, and weakening demand.

With the impact of the majority of the spending and living standards squeeze still to be felt from this April onwards, it has also become clear that there are worse times ahead than most had hoped for.

With the failure of the government on jobs and growth, if Labour forms a government after the next general election in 2015, it is likely to inherit a significant deficit and still-weak public finances. Times are tough and the UK and Scottish governments’ reckless plans are continuing to choke off prospects for recovery and depress demand.

Scottish Labour would do things differently and is pressing the UK government to begin prioritising a plan for jobs, growth and long-term investment.

The Resolution Foundation published further evidence this week that even on highly optimistic Office for Budget Responsibility forecasts of a return to the previous trend-rate growth of 2.5 per cent per year by 2015, the inequality gap between rich and poor will have widened, and that real household incomes for low and middle earner households could still be eight per cent below their 2007 peak levels by 2020 if there is near-stagnant growth instead.

The Child Poverty Action Group is predicting a record rise in child poverty levels of 800,000 by 2020 without a change in economic course now. Evidence is mounting, from the IMF to the chairman of the White House Council of Economic Advisers, that economies with higher levels of equality experience higher growth.

A particular urgency has been added to this debate by the International Labor Organisation’s prediction last October of a global youth unemployment crisis if action is not taken by governments now on jobs.

An important step in the right direction entails taxing bank bonuses to get up to 10,000 young people in Scotland into work, and temporarily cut VAT to boost the economy and help squeezed households and businesses.

Instead of putting people out of work and borrowing £158 billion more over the parliament as a consequence, the UK government ought to heed economic sense, change course and put jobs first.

On an EU-level, the ratings agency Standard and Poor’s said recently that austerity on its own had been entirely self-defeating in the last year.

Added to this, the IMF in its world economic outlook report is likely to forecast that the Eurozone economy will contract by 0.5 per cent this year, some 1.6 per cent lower than in its September forecast, and the IMF, together with the World Bank, World Trade Organisation and eight other organisations, ahead of the World Economic Forum in Davos this week, are calling on governments to adopt policies better suited to the creation of jobs and economic growth.

IMF managing director Christine Lagarde has reiterated that for some countries, a slower rate of fiscal consolidation should be considered.

The rules for the stability pact being negotiated by the Eurozone governments require deficits no higher than three per cent, national debt never exceeding 60 per cent of GDP, and the structural deficit only exceeding 0.5 per cent of GDP in exceptional circumstances where a severe downturn is being experienced.

Currently, 14 out of 17 Eurozone states would fail the rules on the deficit, 13 out of the 17 on debt, and would face fines from the European Commission if they sought to provide capacity for their economies to grow by easing fiscal policy.

In the context of the current debate on whether Scotland should become a separate state, and leave the UK financial system this is a crucial point.

If Scotland separated from the rest of the UK and wanted to re-join the EU, the EU treaties are clear – even if the SNP are not – on what our currency would be expected to be in the medium-term. Only the UK and Denmark have an opt-out from the Euro by law, and only Sweden has had the option on whether to join the exchange rate mechanism or not.

So leaving the UK would mean a separate Scotland loses that opt-out and would have to commit itself in its application for re-accession to eventual Eurozone membership, just as Croatia has done in its recent accession treaty prior to joining the EU next year. For the SNP, the inconvenient truth is Scotland’s membership of the UK gives us the best of both worlds in Europe: we are in the EU, but not in the Euro.

Preparing the economy for Euro membership would see Scotland have to make deeper spending cuts in line with the Maastricht convergence criteria, at a time when the rate of youth unemployment is nearing one in four in Scotland, up 123 per cent in the last year.

It’s a price Scotland’s young people shouldn’t be expected to pay.

The Maastricht criteria require a candidate country’s deficit to not exceed three per cent and its total debt to not exceed 60 per cent of GDP barring an exceptional crisis, inflation to be no higher than 1.5 per cent above the best three performing EU member states, long-term interest rates no higher than two per cent above the average in the three best performing EU states on inflation, and membership of the exchange rate mechanism for two years prior to admission to the Euro, without any devaluation of its currency.

With UK debt heading towards a peak of 78 per cent during this parliament according to the Office for Budget Responsibility, and the deficit forecast to meet the Maastricht rule only in 2016 on the optimistic forecasts of growth returning to levels of 2.7 per cent in 2014 and three per cent in 2015, it is unlikely that a separate Scotland taking on its share of debt could meet these fiscal rules without further cuts in public expenditure at a time when economic recovery will not be secure.

Even in the period before joining the Euro, continuing to use sterling as a currency creates real risks. There are only two ways to do so – either through a formal currency and monetary union with the UK, or through a sterlingisation mechanism.

If Scotland broke away, the UK could not be forced into a currency or monetary union. It would be a decision of two separate states.

Even the SNP concede that a separate Scotland would have to give up economic sovereignty to the Bank of England, complying with extremely tough fiscal rules imposed by treaty without accountability to the Scottish parliament.

One of the lessons of the current Eurozone crisis is that a currency and monetary union without proper co-ordination of policy on taxes and expenditure can inhibit the creation of jobs and growth. But what price for a currency union would be required by the financial markets?

There is every prospect that even fiercer austerity measures would be sought, to demonstrate the smaller part of any currency union’s commitment to fiscal rigour given the unlikely prospect of fiscal transfers from the larger unit of the currency union to the smaller unit, at a huge cost to a much-needed improvement in levels of jobs and growth north of the border.

The SNP are now in the incredible position of seeking to use a currency over which Scotland would have just given up all political, monetary and fiscal control. The SNP must explain urgently how breaking up the UK financial system, only to form new fiscal and political institutions necessary under monetary union is in the interests of businesses or workers here.

The simple truth is that it isn’t.

Were the UK to decline to form a currency and monetary union with a separate Scotland, the SNP’s only option would be a sterlingisation mechanism, where the Bank of England would set interest rates in the interests of England, Wales and Northern Ireland only and, crucially, any Scottish Central Bank would not be the lender of last resort nor the issuer of currency.

Important studies from the IMF show that such a policy puts the financial system under severe stress, leaving it open to the possibility of a systemic shock should investors from across the border wish to relocate their assets.

The largest countries which use a version of this mechanism to use the US dollar are Panama, Ecuador, and El Salvador. Oil-producing Ecuador needed to establish a stabilization fund to reassure investors. Panama has no central bank.

Banks would be required to adopt higher capital buffers to provide necessary liquidity to reassure investors. The IMF also says that deregulation of labour markets is required to reassure the markets in states using this currency mechanism.

The SNP must now come clean as to the effects sterlingisation would have – in order to provide liquidity support, higher capital buffers for banks based in Scotland than under the Vickers proposals being adopted in the UK by 2019 at the latest, with the result being fewer assets available to lend to businesses to kick-start growth in Scotland.

The final report of the Vickers Commission found that the total level of support provided by the UK to its banking sector, including the two major Scottish-based banks, was £1.2 trillion.

This would not be available to a separate Scottish state, where bank liabilities could exceed 800 per cent of GDP. That is the life now facing Iceland and Ireland, the not-so-quickly forgotten arc of prosperity which, in the face of financial pressure, was unable to stand effectively.

Those who say this argument is talking Scotland down miss the point and do a disservice to the national debate. This is a real and tangible example of why it is in Scotland’s interests to share risks and resources across the UK.

Business in Scotland knows how severe the effects the last restriction on credit was for Scotland’s economy – the last thing the Scottish economy needs now are proposals which fail to secure financial stability which is the bedrock for securing jobs and growth in any country.

The SNP’s search for an economic paradigm is legendary – the Asian tiger economies of the Far East, New Zealand, the arc of prosperity, the Scandinavian model – every few months brings a new model of how they want the Scottish economy to look. But nowhere do they explain what the problem is to which separation is the answer.

They must now explain how, in the absence of plans for a currency union with the UK, sterlingisation on the Central American model could create a stable framework for a separate state with massive bank liabilities on its national accounts from RBS.

The mess the SNP are in over finances and the currency shows Scotland would better realise the economic potential of its natural resources, and the skills of its people within the United Kingdom, rather than risk businesses, jobs and growth under ill-conceived economic plans for separation.

Scotland’s economic destiny is at the core of the national debate which we will have until it is settled in a clear, decisive referendum.

See also:

• Questions multiply over financial status of an independent Scotland –  Alex Hern, January 20th 2012

• Win or lose, Scottish independence referendum heralds a revolution in UK politics – Ed Jacobs, January 16th 2012

• The Week Outside Westminster – Sending Osborne to save the Union – Ed Jacobs, January 14th 2012

• Devo-max isn’t a solution, it’s a whole new can of worms – Matt Gwilliam, January 11th 2012

• SNP: Cam’s “economic uncertainty” argument is nonsense; we’ll stick to our timetableHumza Yousaf MSP, January 9th 2012

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28 Responses to “Salmond has questions to answer, because the evidence doesn’t support him”

  1. Scott Macdonald

    [email protected]_Bain presents the hard questions for Salmond to answer, and the hard evidence for him to explain:

  2. Political Planet

    Salmond has questions to answer, because the evidence doesn’t support him: William Bain lays out the evidence ag…

  3. keith ferguson

    RT @leftfootfwd: Salmond has questions to answer, because the evidence doesn't support him

  4. Samantha Johnston

    [email protected]_Bain presents the hard questions for Salmond to answer, and the hard evidence for him to explain:

  5. David Jones

    [email protected]_Bain presents the hard questions for Salmond to answer, and the hard evidence for him to explain:

  6. Patron Press - #P2

    #UK : Salmond has questions to answer, because the evidence doesn ’t support him

  7. Pulp Ark

    Salmond has questions to answer, because the… #Sustainable_Economy #bailout #banks #Devo_Max #muslim #tcot #sioa

  8. leftlinks

    Left Foot Forward – Salmond has questions to answer, because the evidence doesn’t support him

  9. William Bain

    [email protected]_Bain presents the hard questions for Salmond to answer, and the hard evidence for him to explain:

  10. Alex Braithwaite

    RT @leftfootfwd: Salmond has questions to answer, because the evidence doesn't support him

  11. PAIRSonnalites | ES |: The Child Poverty Action Group is predicting a record rise in child poverty ……. | #ESPR

  12. PAIRSonnalites | ES |: The Child Poverty Action Group is predicting a record rise in child poverty ……. | #AMPR

  13. martin kerr

    As those arguments have been successfully rebutted elsewhere it just shows that Willie Bain should maybe reconsider who he is trying to impress.

    Scotland has thought the options through and counted the cost

    As to use of using sterling which is a tradeable currency i.e. any country in the World can use it without Osborne or anyone elses permission couple with the fact Scotland has a share in the Bank of England as do other nations on these Isles.

    I hardly think that Labour can criticise any other party over finances with the debts that it has left the UK in.

  14. John Ruddy

    Hardly an unbiased letter to the FT, though was it? Seeing as it comes from a member of the SNP Governments own council of economic advisors?

    I think it is clear to say that there is no consensus on what WOULD happen – something like this simply hasnt happened anywhere else before. The Treaty of Union in 1707 was really all about creating a single market, allowing access to funding across these islands. Seperation may allow that to continue, but it would surely have consequences which have not been thought through by the politicians urging it, even if it has by some academics. For consequences there would be – you cannot do something and see no changes.

  15. Angus McLellan

    That’s true John, you cannot do something and hope to see no changes. And that includes voting No. So perhaps you or Willie can tell us what changes you foresee if you get your wish?

    Your past efforts, building on earlier fine work by Lang, Rifkind and Forsyth, seem to have convinced a majority of English people that Scotland is a land of subsidy junkies. What’s the next step in the grand design?

  16. Mr. Sensible

    Independence would simply be too much of a risk to take.

  17. William Bain

    @scouriebeast @GailLythgoe Link is here –

  18. Anonymous

    A little illumination:

    Some more will be along later today.

  19. Anonymous

    Crossing the street is too much of a risk to take if you have no confidence in yourself.

    The anti-independence parties are scare-mongering in order to try to make sure that Scots will not have confidence in their country. Ask yourself why that might be.

  20. Anonymous

    On the question of EU membership which has been raised, there is substantial legal opinion according to which both independent Scotland and the residual UK would succeed to the UK’s existing membership of the EU, but now as two States rather than as one. Consequently, no question of a Spanish or other veto could arise and there could be no question of Scotland being required to adopt the single currency, although it might opt to do so at a suitable time after a referendum on the issue:

    “(…) the question to ask is whether the CJEU [Court of Justice of the European Union] would consider that the fact that Scotland became independent required that all (or any portion) of the previous UK citizenry thereby be deprived of their acquired rights as EU citizens? Given the CJEU’s high theology of the primacy of EU law, and of EU citizenship as being ‘the fundamental status of nationals of the Member States’, it is suggested that the most likely position that the Luxembourg court would take, if faced with the question of Scottish independence, would be (…) ‘separation’ (…) That is to say that the CJEU would rule that Scotland and EWNI [England, Wales and Northern Ireland] should each succeed to the UK’s existing membership of the EU, but now as two States rather than as one. Such a ruling by the Court would affirm the primacy of EU law over national and international law, confirm the role of the CJEU as the final arbiter on such weighty matters of State(s), and be presented as EU law re-connecting with, and protecting the acquired rights of, individual EU citizens.” (Aidan O’Neill QC, Eutopia Law, November 14th 2011)

  21. Anonymous

    The problem to which independence is the answer is touched upon in First Minister Salmond’s Beacon Lecture, which he delivered in London yesterday:

    Also here:

  22. Anonymous

    Why Scotland will become independent:

    – We currently generate 9.4% of UK wealth with 8.4% of population and put to the UK Treasury than we get back.
    – We will be able to make decisions that benefit Scotland to grow our economy instead of UK policies which benefit London and South East of England.
    – We will be able to get a sovereign parliament that is elected by the people of Scotland and has a mandate in Scotland (unlike having 30 years out of the last 50 with a UK Government which Scotland did not vote for).
    – We will be not be forced to go into illegal wars.
    – We will be free from nuclear weapons and Scotland in the future will no longer be nuclear dump site
    – we have 25% of the total renewable energy potential of the EU within Scotland’s territorial waters and land (tidal, wave and wind)
    – We have the largest oil and gas reserves in the EU with as much still in the ground as already extracted (> £1 trillion resource)
    – We have the largest and best fishing grounds in Europe which have been bargained away by the UK for adavtages for London and South East England
    – We will have greater personal pride and build a ‘oil fund’ like Norway for future generations.
    – We receive less in Scotland in rural development funding (EU Common Agricultual Policy) from the EU due to us being within the UK.
    – We do not have an independent seat in the UN and EU or any other international organisation as our views are represented by the UK.
    – We will become a fairier society and not be hamstrung by far right polices which our country never voted from Conservatives and increasingly Lib Dems and Labour.
    – We will not be subjected to privatisation of NHS, social care or education being pursued by Labour, Lib Dems and Conservatives.
    – We will use all our wealth in Scotland instead of sending to UK Treasury we can help to increase quality of life, life expectancy,literacy, education and social cohesion to match other small northern European countries (Denmark, Norway etc).
    – Small northern European countries like Norway, Denmark, Finland, and even still Ireland and Iceland, beat the UK in UN HDI (Human Developmen Index) and quality of life indicators.
    – Scotland will rise to become the 6th wealthiest country in the world (OECD) whereas we are currently 16th as part of UK. (the UK will drop to 22nd without Scotland)

    Why the UK (British establishment and Westminster) wants Scotland to remain in union::

    – They will lose 8.4% of UK population
    – They will lose roughly 10% GDP and 2 of the top 4 UK manufactucting exports
    – They will lose roughly 33% of total land mass
    – They will lose hugely in international importance, lose the union flag and UK state will no longer exist
    – They will lose permanent security council seat in UN
    – They will lose seats in the EU
    – They will lose Sterling being backed by Scottish oil
    – They will drop even further and quicker down the list of largest economies
    – They will lose a nuclear dumping site
    – They will lose the base for all the nuclear weapons in the UK
    – They will lose 25% of the potential renewables resources in the EU
    – They will lose 8.4% of all UK assests

  23. Déjà vu as Scottish referendum campaign turns nasty | Left Foot Forward

    […] also: • Salmond has questions to answer, because the evidence doesn’t support him – William Bain MP, January 24th […]

  24. Ed's Talking Balls

    Oh, to live in this utopian land!

    One of the heartier laughs I’ve had today, so thanks for that.

  25. Anonymous

    Please highlight the parts you diasgree with and give details of your alternative view for each point I have made if what I have written amuses you.

    While we are at it where is this elusive “positive case for Scotland staying in the union”? We have heard this many time over the years but the case has still to be made.

    Is the reason why it cannot be expressed is that there is in fact no positive case for Scotland staying within the union?

    You bet it is…!

  26. Ed's Talking Balls

    Fair enough.

    1. ‘We will be not be forced to go into illegal wars’

    What do you mean by this? I assume you’re referring to Iraq? But was that officially illegal: has that been determined? Even if it was, I can’t think of any other illegal wars recently, so the plural is probably an exaggeration. Besides, I don’t know what the SNP’s foreign policy is. Maybe an independent Scotland would sit idly by and watch Libyans get massacred. I don’t have a crystal ball.

    2. ‘we have 25% of the total renewable energy potential of the EU within Scotland’s territorial waters and land (tidal, wave and wind)’

    I don’t know if this is true or not, but will take you at your word. Still, I presume that any turbines etc were funded by British money, hence aren’t exclusively Scottish.

    3. ‘We have the largest oil and gas reserves in the EU with as much still in the ground as already extracted (> £1 trillion resource)’

    The oil isn’t all yours. Unless Cameron and co are utterly stupid and/or cowardly, Britain won’t be surrendering its claims to that resource. Similarly, just as assets are going to need to be divided, so too will liabilities.

    4. ‘Small northern European countries like Norway, Denmark, Finland, and even still Ireland and Iceland, beat the UK in UN HDI (Human Developmen Index) and quality of life indicators’

    I admire your confidence but don’t see why Scotland will inevitably emulate the Scandinavian states.

    5. Scotland will rise to become the 6th wealthiest country in the world (OECD) whereas we are currently 16th as part of UK. (the UK will drop to 22nd without Scotland)

    I’m sceptical that an independent Scotland would become an economic powerhouse ahead of Brazil and India in the rankings. I’m also not convinced that Britain would fall behind Poland and Mexico. I don’t know where you’ve got your figures from.

    6. ‘They will lose hugely in international importance’

    I think you’re overestimating the importance of Scotland to Britain. I don’t think the rest of the world will see us an irrelevance if a country decides to go a different way.

    7. ‘They will lose permanent security council seat in UN’

    Erm, on what basis? There’s been no suggestion of this whatsoever. However, if we’re playing the guessing game, I’d say it’s a hell of a lot more likely that Britain will retain its seat on the UNSC than Scotland will get one. I don’t really rate Britain’s international influence anyway nowadays, but I’m certain that the rest of the world won’t suddenly sit up and listen to whatever Alex Salmond has to say about international affairs.

  27. Anonymous

    In point 1, you profess not to have a crystal ball but in points 4, 5, 6 and 7 you seem to be using one. Have you got a crystal ball or not are are you in fact talking balls?
    I seem to have missed your poitive case for the Union. Can you restate it again please?
    Point 2 is just wrong, the small numbers of tidal turbines in operation so far are all totally privately funded or are funded in partnership with the Scottish Government. No UK treasury money has been used for any of this. The Crown Estates however still stand to make a killing. Money for ground rent(even if it is sub-surface) will go straight to Westminster.

  28. Ed's Talking Balls

    Why would I want to make a positive case? I’m in favour of separation.

    It would be refreshing to see Salmond have to take the blame should an independent Scotland, in fact, not turn out to be this land of milk and honey. At the moment, it’s just so easy for him to blame all his country’s ills on the evil people of London and the South East. People seem happy to swallow it.

    In terms of my ‘crystal ball’, I’ll think you’ll find that I was clear in saying that my guesses were just that. Unlike slainte_mhath, I used phrases such as ‘I think’ rather than ‘Scotland will’.

    I’m just baffled by this certainty which all nationalists seem to share that Scotland, free of Westminster’s shackles, will be a utopia. We will have to see as I think it’s a case of “when” rather than “if” by now.

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