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.
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27 Responses to “Fiscal union within the UK is the foundation of Scotland’s future growth and fairness”
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
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.”
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…
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!
Spammo Twatbury
And by all means keep attacking the messenger instead of addressing the message. It’s worked so well for you since 2007.