Fiscal union within the UK is the foundation of Scotland’s future growth and fairness

Willie Bain MP explains why Scotland is stronger staying in a fiscal union with the UK, especially during a times of recession, like the one we are in.

 

William Bain MP (Labour, Glasgow North East) is a shadow Scotland Office minister

As the Scottish construction industry reminded politicians at a summit for the sector in my constituency last week, a stable macro-economic framework, reformed banks, and new economic institutions and investment to boost infrastructure and strategically important industries, are all vital to increasing Scotland’s growth rate, and in tackling the symptoms of the current chronic shortage of economic demand running at just a tenth of that in the USA: under-employment in Scotland of some 270,000 people, soaring long-term youth and female unemployment, and declining living standards with continuing quarterly falls in real wages.

The key lessons from the eurozone crisis are that currency union without a full monetary union, and currency union without fiscal and political union, is a poor foundation upon which to expect business to invest and plan for future growth. Countries need to do more than simply use the same currency and short-term interest rates.

The sharing of risk and resources across a common financial system is vital too. The reason fiscal union works in the United States is that Washington is able to boost demand, and support less affluent states by redistribution of resources.

Virginia, for example, received $590 billion, and Florida nearly $300bn, in fiscal transfers from the federal government between 1990 and 2009. It works for Scotland within the United Kingdom too, which provided net transfers from the UK government to Scotland of some £75.8bn between 1999 and 2008.

When the recession hit in 2008, the automatic stabilisers from the UK kicked in. On separation, these would be lost in the event of any future downturns. If the United States and the rest of the European Union show us stronger fiscal union is desirable, why on earth would we choose this moment to weaken or abolish fiscal union with the UK, as the SNP propose in the event of separation?

Financial union means Scottish savers know their assets in the bank are protected by a UK guarantee of up to £85,000 for every individual in the event of failure in the Scottish banking system;£1.2 trillion in UK support through loans, guarantees, and bailouts meant banks – including the two major institutions based in Scotland – were saved without lengthy negotiation with other countries, and chaos for Scottish account holders or businesses.

John Swinney’s admission (£) that a separate Scotland could not have bailed out either RBS or HBOS, and would have been cap in hand to other states for support on higher rates of interest for such bailouts, is belated recognition fiscal and financial union with the UK benefits Scotland, and is the platform for future growth.

Government borrowing costs are a function of bond yields and market confidence in the state’s creditworthiness. In the UK, current yields on ten-year bonds are at 1.80%, in the US at 1.84%, because of the monetary policy activism from both the Bank of England and the US Federal Reserve.

The Bank of England owns almost one third of national debt through the purchases of Treasury bonds or gilts through its £325bn quantitative easing programme. Within the eurozone – apart from the spike in Madrid over the last few days – bond yields in Italy and Spain have fallen by 60 basis points over the last month owing to the aggressive bond purchase policy conducted by the European Central Bank.

The SNP proposals for a separate state, however, would leave Scotland as the only aspirant or actual EU state without its own central bank or financial services regulator, or full membership of similar supra-national institutions. Under their plans, the Bank of England would be the lender of last resort to support the Scottish-based banks, and set short-term interest rates, but would not be a supra-national monetary authority like the ECB.

The crucial distinction between the SNP’s plans and the cross-UK support the Bank of England provides at the moment, is that the Bank would not be authorised to purchase Scottish government bonds under any future use of its asset purchase scheme post-separation, and that Scotland would cease to have any direct benefit from this method of monetary easing.

Keynes was memorably scathing about relying exclusively on monetary policy to combat weak demand in the liquidity trap conditions we face again now. But neither would he have supported a flawed permanent macro-economic framework conducted through splitting decisions on taxes, borrowing and spending from those on interest rates – a model which spectacularly failed in the eurozone, for large countries like Spain and Italy, as well as smaller states like Ireland and Greece.

Without the control over its own money supply, or the ability to print its own currency, a separate Scotland would be without the monetary policy tools the UK would continue to possess to climb out of the longest slump since the Long Depression of the 1870s. Scotland would inherit a per capita share of public debt at nearly 80% of GDP in 2016, which of smaller non-bailout EU states, is exceeded by only Belgium and Hungary.

Bond yields and borrowing costs would be higher in relative terms than those of the UK, and as a succession of economists from Martin Wolf to Christopher Allsopp have established, this plus international money market pressures means spending must fall, or personal taxes rise to fill in the gap.

John Swinney’s comments last week add more questions about the credibility of his proposals for a post-separation financial system:

• What would be the level of guaranteed bank savings for depositors in a separate Scotland?

• Could a separate Scotland guarantee those parts of RBS and HBOS based here would have the same credit ratings as those they currently have within the financial system of the United Kingdom?

How could he ensure the Vickers recommendations on banking reform applied to Scotland at the earliest possible date if it became a separate state, but the Bank of England was acting as lender of last resort?

• What would the Scottish government’s upper limit on public borrowing be – 60% of GDP, 70%, 75%, or 80%?

• Would this be defined in the permanent inter-governmental Fiscal Treaty he wishes to negotiate with George Osborne after the referendum, or would it have the status of a constitutional rule, which is the case in Spain, and the 24 other EU states to have signed their own fiscal pact?

• What influence could Scotland have on the regulation of financial services, or of future asset or house price volatility, if this is to be left to the central bank of a foreign state?

Avoiding risk and uncertainty for workers, businesses, and savers under separation is simply another reason why the financial systems of Scotland and the rest of the UK work better together.

A progressive agenda for Scottish Labour of cutting the rising gap between high and low pay; introducing a living wage in those sectors of the economy where that works; changing corporate governance to promote long-term investment rather than short-term profit taking; improving childcare and levels of female participation in the labour market… – these all show the benefits of how we can co-operate across the United Kingdom to achieve social progress together.

The evidence is clear – countries with a smaller gap between rich and poor experience higher long-term growth rates; we have the will to build a more equal society, and with a strong devolved Parliament remaining within the UK, the best combination of means to achieve it.

27 Responses to “Fiscal union within the UK is the foundation of Scotland’s future growth and fairness”

  1. LB

    The evidence is clear – countries with a smaller gap between rich and poor experience higher long-term growth rates; we have the will to build a more equal society, and with a strong devolved Parliament remaining within the UK, the best combination of means to achieve it.

    ================

    Evidence? Not given. Just an unfounded claim.

    Meanwhile, countries with low taxes have higher growth rates.

    For corporate tax see

    http://www.taxpayersalliance.com/cwf_corporation_tax_paper_final_lowres.pdf

    Page 9

  2. Jon

    TPA as a citation? That’s a fail.

  3. mac

    Willie Bain would prefer that Scotland is governed by Tories in London than by Scots in Edinburgh. Willie Bain would prefer Tory cuts in Scottish public services than balanced Scottish budgets. Willie Bain would prefer that the Tories have a veto on more powers for the Scottish parliament and so deny Scots a voice. Willie Bain would prefer to stand shoulder to shoulder with the Tories than with his ain folk. It is little wonder Labour in Scotland is becoming just as toxic as the Tories are.

  4. Newsbot9

    He’s gotta give kickbacks to his funders, don’t you know!

  5. Newsbot9

    He’s a dissenting voice in a democracy, and all you do is chant about how he’s holding views which he hasn’t expressed rather than engage in honest debate about his points, even if you disagree with them (I certainly do with some, and I’m British). This says a lot about you.

    Meanwhile, the separatists are ACTUALLY working to help the Tories establish their One Party State, which can be seen with a little math (including the Tory gerrymandering…)

  6. Thomas Coles

    Lamont (leader of Scottish Labour) said: “Scotland cannot be the only something-for-nothing country in the world.”
    David Cameron: ” I loathe with a passion the bankrupt, high-taxing, something for nothing society… ”

    Spot the difference. New Labour, Conservatives?

  7. Newsbot9

    One was talking about a country, the other was attacking the poor.

  8. Spammo Twatbury

    I’ve got to hand it to you, Newsbot – you might be thick as mince, but you’re tireless. One thing, though – Willie Bain is a Westminster MP, not a Holyrood one. He is therefore NOT a “dissenting” voice. He speaks with the voice shared by the Tory/Labour/Lib Dem neoliberal consensus, which insists there is no alternative to austerity. He’s as establishment as it gets.

  9. Newsbot9

    Ah yes, because I challenge your views I’m inherently thick. And keep up the jingoism…you’re basically showing the rest of the Scots how hostile you are.

  10. Drew Edward

    Labour will have to go some way to explain the logic of why having control of around 60% of the budget is a brilliant idea, but taking control of the remaining 40% would be a total disaster.

  11. Sneekyboy

    When looking at international
    finance I tend to take the word of actual professional economists rather than
    Westminster MP’s with an agenda. For instance your argument on currency union
    has been thoroughly debunked by Professors Hughes Hallet and Drew Scott (See
    Below)

    Sir, Martin Wolf (“Scotland needs to judge the costs of independence”,
    January 20) raises important questions regarding the conduct of monetary and
    fiscal policies in an independent Scotland, should Scotland retain sterling as
    its currency. However, the picture he presents is undeservedly negative.

    First he assumes that independent countries are unable, or unwilling,
    to co-operate over matters of mutual interest. One example is the future
    regulation of Scotland’s financial services where one would expect the Bank of
    England to retain overall responsibility to ensure that the UK internal market
    for financial products – from which all consumers benefit – remains intact. Mr
    Wolf argues that a Scottish government would be unable to rescue financial
    institutions in distress, encouraging the banking sector to relocate south of
    the border.

    But if the regulations are effective and apply with equal force in both
    counties, the only reason for so doing would be a belief that the rUK
    (remainder of the UK) government both would and could (and Scotland would not
    or could not) underwrite all bank liabilities within their own territory,
    though not in another jurisdiction.

    Applying this logic across the board would, of course, have spelt the
    end of all cross-border banking operations long ago and does not reflect the
    co-operative, and self-interested, international response to previous financial
    crises. It would also reflect an almost inconceivable failure on the part of UK
    and European Union financial services regulators to reform the regulatory
    system to ensure the conditions precipitating the crash of 2008 do not recur.

    It is worth recalling that the US authorities, in co-operation with the
    UK government, bailed out the Bank of Scotland and the Royal Bank of Scotland
    to the tune of $180bn and $230bn respectively in 2008. Similarly the Dutch,
    Belgian and French authorities jointly bailed out the Dexia bank and Fortis
    Bank (twice) rather than allow either to collapse in one, and hence all three,
    jurisdictions.

    The second assumption is that the Bank of England would not stand ready
    to bail out a Scottish government finding itself with an unsustainable fiscal
    debt. The analogue here is the eurozone where 17 countries use the same
    currency but none has legal or political authority over the central bank
    responsible for their currency. No one seriously believes that the European
    Central Bank printing money to bail out indebted sovereigns is the solution to
    that crisis; indeed, under current statutes, the ECB is not allowed to.
    Nevertheless, the ECB has found it necessary to bail out illiquid and insolvent
    institutions within its member states repeatedly since 2007, and continues to
    do so in tranches of €500bn at a time.

    Evidently it fears a financial markets collapse originating in the
    periphery of its currency zone more than it fears arguments over who should be
    held responsible or whether the ECB should intervene in the public interest

    (including the more disciplined) before the whole system collapses. Why would
    the Bank of England be different? And who is to say the more disciplined won’t
    be the problem cases in the future?

    The key is to separate private risk from sovereign risk, and provide a
    lender of last resort facility that underpins the stability of the private
    financial markets; plus fiscal constraints to minimise the chances of sovereign
    default. The former requires a rigorous system of financial regulation; the
    latter a system of debt limits with effective sanctions (a debt protocol)
    operated by an independent fiscal policy watchdog. Having separated the two,
    problems in the financial sector can be treated on merit and by targeted
    lending of last resort. Unsustainable fiscal policies will eventually be ruled
    out by technocratic solutions. But in normal times, markets and policymakers
    are free to pursue their own interests without constraint.

    Which regime the Scottish government eventually chooses remains to be
    seen. But Scotland has certainly thought the options through and counted their
    cost. An independent Scotland would have to implement and observe strict fiscal
    and financial rules to prevent unsustainable imbalances emerging. However, this
    is a matter of institutional quality and the determination of the politicians.
    It is not part of sterling zone membership.

    Andrew Hughes
    Hallett, St Andrews University and Scottish Council of Economic Advisers

    Drew Scott, School of
    Law, University of Edinburgh

  12. Sneekyboy

    Further to the last point your position on the Banking
    crisis has also been thoroughly discredited by professor Andrew Hughes-Hallett:
    Professor of Economics, University of St
    Andrew’s

    “by international
    convention, when banks which operate in more than one country get into these
    sorts of conditions, the bailout is shared in proportion to the area of
    activities of those banks, and therefore it’s shared between several
    countries.”

    “And the
    precedent for this, if you want to go into the details, are the Fortis Bank and
    the Dexia Bank, which are two banks which were shared between France, Belgium
    and the Netherlands, at the same time were bailed out in proportion by France,
    Belgium and the Netherlands. And furthermore the Government itself – of which
    Michael Moore, naturally, is a member – has already made its calculations of
    what Scotland’s own contribution to the bailout would have been. And that comes
    to… because I looked the numbers up and I used the latest GERS, that comes to
    about £0.9 billion”

    “The last point I
    would make is by calculations from the Treasury and elsewhere, the cost of the
    bailout is actually largely in terms of interest charges in … and so on of
    loans that were made. The rest was actually guarantees, and therefore no money
    has actually changed hands in that sense. Of course, that makes it, of course,
    altogether cheaper, but as I said at the beginning, the real point is that it’s
    always the case here with bailouts of this kind – it’s shared across the
    countries. I might point out that it’s also… it’s not just the UK Government,
    but the US government, in the form of the Federal Reserve, bailed out on
    liquidity basis both RBS and HBOS. I think it was about $200 billon for HBOS
    and about $400 billion for RBS. That’s another example of international
    sharing.”

  13. Sneekyboy

    Willie Bain says the following:
    “The reason fiscal union works in the United States is that Washington is able to boost demand, and support less affluent states by redistribution of resources. Virginia, for example, received $590 billion, and Florida nearly $300bn, in fiscal transfers from the federal government between 1990 and 2009. It works for Scotland within the United Kingdom too, which provided net transfers from the UK government to Scotland of some £75.8bn between 1999 and 2008.”
    He helpfully provides a link to where he gets these figures from and lo and behold its this document from the Scotland Office (which is the pre Niall Alsen era).
    In other words he is showing the figures for Scotland not including ANY north sea Oil and Gas Revenues OR any corporation Tax…

  14. Bill C

    Willie you are having a laugh. Have you seen your leaders agenda attacking the poor, the sick, the elderly,and the young of Scotland ? Fairness get real. Scottish Labour are history!

  15. Spammo Twatbury

    And by all means keep attacking the messenger instead of addressing the message. It’s worked so well for you since 2007.

  16. Newsbot9

    Thank you for describing exactly what you’re doing, attacking me for pointing out your lies and fanaticism.

    Your spitting on anyone who doesn’t believe in your separatism is a nasty habit.

  17. Thomas William Dunlop

    Dear Willie. Nice article but how can I be sure you truly mean it, or are you following the Principle that you laid down last year? (in opposing anything the opposition propose)

  18. Newsbot9

    Yes, except Scotland is part of the UK. And the bailout was by the UK government, not the Scottish one. So, er…no, it’s a completely different situation and it would have to be negotiated, if Scotland should vote for independence.

  19. Newsbot9

    So basically you’re counting on the Tory goodwill, and the EU being willing to take on an indebted member. Um.

  20. Charles Patrick O'Brien

    The Westminster MP,s have only self-interest in mind,great pay lovely expenses.But some of the stories are beauties,The banking one is a cracker,and its the way he tells it.Firstly the RBS as a strictly Scottish bank would not have been messing about in London,and allowing the money men to rip it apart.But,the bank debts would have been covered as under international and EU law its the country the bank is in that covers the losses.The system in the USA is not one that you can use comparison with like I must be good because I am not as bad as you! The last part “The evidence is -clear countries with a smaller gap between rich and poor!! what Labour presided over the gap getting wider every month when they were in power really bad example.We are never going to be able to convince the south to co-operate they are to self-centred and greedy,one bit of these island can become more socially aware and this may lead to the rest seeing it and then follow,maybe! But like all of those Labour MP,s they are only interested in themselves.

  21. Charles Patrick O'Brien

    Separatist the constant use of the word is making it acceptable,even though I still cant find any other country that celebrate its SEPARATIST DAY,its usually INDEPENDENCE DAY,still it amusing.You mention democracy well being self-reliant ,and self-governing with self-determination is what democracy is about,not having the wishes of a country that is in a UNION be over-ridden to keep the other partner happy.

  22. Charles Patrick O'Brien

    Jingoism is a Brit-nat trade mark.

  23. Charles Patrick O'Brien

    Just read Margaret Curran’s opinion,on the Secretary of State for Scotland Michael Moore,and her attack,on him.Then she proceeds to have another go at at the SNP.This from a career politician who could not wait to join the M.P,s at Westminster,she has ambition for herself and as for her “jam tomorrow” dig at the Scottish government,its herself who is putting up a smokescreen.If she was so concerned over Holyrood she would have stayed and fought the SNP from there,but bigger pay and great expenses,was too big a temptation.It is self-self interest that keeps the Labour party wanting to remain in the union,and of course orders from London. Scottish Labour! NO SUCH PARTY.
    She talks of policies but declines to tell us what they are,she criticises everybody but forgets with criticism comes solutions where are they Ms. Curran?
    Defending Lamont or protecting her next step?
    The pay-offs for civil servants also being complained about gave me this thought which party put these types of payments and the amounts on “the books” hmm Labour I think,some of the biggest pay-offs came from Labour controlled Councils,and when the Labour M.P. or M.S.P. lost a seat there was always a nice council job waiting,just for one of the boys/girls.
    About time some responsibility was taken for what they have done (Labour Party)and some sincere policies put up for discussion,we cant be fooled for ever,although by the way Labour react you would think the expected us to be taken in constantly.
    Labour your not in power any more and sour grapes wont help.

  24. Newsbot9

    Ah yes, blaming everyone else for your sins, the typical far right approach to criticism.

  25. Newsbot9

    Nice rant.

    “Shame” I’m not a Labourite and you’re arguing with yourself.

  26. Newsbot9

    It’s an accurate, descriptive word. Your refusal to accept it’s usage is simply more froth spewing.

    There will be a vote. Everyone accepts this. Why do you need to rant and rage?

  27. Bill C

    I have to admit Willie you share your unionist bed with some crackers on here, thank God they are in your camp and not on the YES side! As for your economics, I am embarressed that a fellow Scot would demean his own country in such a way. Your argument lacks validity, it is the argument of the too wee, too poor and too stupid brigade, even Cameron and company have admitted that an independent Scotland is a viable Scotland. In any case, independence is so much more than just economics. It is about self respect and people who live in Scotland making decisions for Scotland, of course that is obviously an alien concept to those who rely on the Westminster gravy train to earn a living.

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