The Wealth of Nations

Leith Banking Company Five Pound Note from 1825

Leith Banking Company Five Pound Note from 1825. Scan © Pam West British Notes



 

Pound Positive

 

As the year opened and the pace of the campaign on both sides of the independence debate really started to ramp up, there was a peculiar moment on February 13th that felt to me like it would be the point history would look back on as the beginning of the collapse of the Better Together campaign. That moment was the speech by the Chancellor of the Exchequer George Osbourne, delivered in Edinburgh. You can watch some of the speach on Youtube and the transcript is on GOV.uk.

 

This was the speech that lit the touch paper on what has become one of the cornerstones of the Better Together campaign: should Scotland vote for independence, Scots would no longer be able to use the pound. This terrifying situation should be avoided by voting No and staying in the UK.

 

This was an extraordinary speech in many ways. This quote stands out for me as being the core of the only positive message the pro-Union side has made:

 

Today Scotland is one of the most economically successful parts of the UK, with growth per head the same as the smaller independent European states the Scottish government would like Scotland to join… but with far more stability and less volatility than them, thanks to being part of the wider UK. ~ George Osbourne

 

The speech is filled with positive references to Scotland’s good economic condition, its faster growth and its faster recovery from the financial crisis. He even managed to keep any implication that he was responsible for these out of the text. From here, the positive message for the whole campaign could have and should have continued; about how that economic growth is linked to the growth across the country, about how the rest of the UK benefits from Scottish growth and how the sharing of assets like North Sea Oil helps underpin the financial stability of the whole country.

 

This was the positive economic case for the union that was sadly not to be.

 

Playing Hardball

 

Instead, George starkly issued a threat: Leave the UK and all your money will be taken away:

 

People need to know – that is not going to happen. Because sharing the pound is not in the interests of either the people of Scotland or the rest of the UK.

 

What he actually was ruling out was the rUK entering into a formal currency union with a newly Independent Scotland, effectively meaning that the asset that is the Bank of England (repository of both nations reserves and both nations debts) would be kept wholesale by the rUK.

 

The implied consequence of this, as heavily and repeatedly spun by Better Together, is that there would cease to be any money in your bank account, that employers would no longer have any money to pay salaries and that pension payments would cease to happen. There has been a steady stream of assertions like this:

 

“No-one knows what the currency will be but it won’t be the pound“ ~ Johann Lamont

 

Both of those things stuck in my craw a little. The first because it is fairly blatant pre-negotiation which, although not against the letter of the Edinburgh Agreement is most certainly against the spirit of it. The arguments why this stance would be adopted also rankles; why wouldn’t a pound still under-written partly by North Sea Oil revenue and historic national debt shared proportionately between the two countries or a single currency area be beneficial to everyone?

 

It frankly stinks of hardball politics and the worst outcome of it would simply be no formal currency union and therefore no historic national debt, which would be quite OK for Scotland and quite unnecesarily crappy for the rUK. That position on debt’s also a hardball one, but probably a fair one in the circumstances.

 

The second part is what has irked me continuously since that speech; the spinning of the threat to retain the BoE as having the consequence of all money mysteriously disappearing up the wazoo. It is easy to encourage “wont share the pound” becoming conflated with “pound dissapears entirely” or slightly more charitably, that the colour of the notes in your pocket will change to something new… isn’t that also scary? I mean, how well do you cope having to deal with foreign currency when you’re on holiday? It’ll be like that all the time in an independent Scotland!

 

Bollocks

 

It’s so obviously bollocks that it shouldn’t really even need said that it is bollocks. But please bear with me while I aim a few swift kicks at the dangling fruit.

 

The reason a change of currency seems scary is because it takes very slightly more than two weeks to get used to dealing with a new currency and most folk only every go on holiday and use another currency for about two weeks. I’ve been living abroad for a wee while now and I can tell you that the on-holiday-can’t-deal-with-this-foreign-money thing only goes on for about three weeks. After that you start to evaluate everything in terms of the new currency and you adapt to it perfectly easily. Of course you still work out the “equivalent in pounds” now and again, but the scary cognitive dissonance that we are being played with goes away within a month, I promise.

 

Remember decimilization? Some of you will, it was only in 1971 – a little before my time, but I do remember spending shillings as five pence pieces because they hadn’t been completely phased out yet. I’m sure the process was likely a bit disconcerting or even scary, but ultimately changing currency was not something to fear.

 

Any wholesale change would not happen immediately, we would simply continue to use the pound without a formal union. Such an arrangement is definite in all “Plan B”s for at least the short term and is a perfectly viable mid-term plan too. It’s less good than a formal currency for many reasons, but if we were in that position it might well also mean we have a blank slate defecit position, which would more than make up for it (see hardball negotiation, above). The money in your wallet will still be the pound even if the rUK politicians really are silly enough to make good on their threat.

 

The Difference between Money and Wealth

 

What should have been a civilised debate about economics has been replaced with quite ridiculous fear mongering and deepest still there is a fear that is also being played to that is such bollocks it deserves a special game of roshambo all to itself. Without the pound sterling, we would not have any money.

 

Money is a way of measuring and tracking wealth. It is not in and of itself wealth. It is valuable because of the service it provides; which is delivering a system of exchange for wealth. George Osbourne made a couple of valuable insights into this in that infamous February speech:

 

…the currency we use is about so much more than notes and coins. It’s about the value of our savings our power to purchase the everyday things we need and how we make the wheels of trade and commerce turn.

 

and

 

The value of the pound doesn’t lie in the paper and ink that’s used to print it. The value of the pound lies in the entire monetary system underpinning it. A system that includes the Bank of England and the tens of millions of UK taxpayers who stand behind that financial system.

 

Absolutely correct, George. The currency is not the wealth, it is just the yard stick by which it is measured. Scotland’s savings and Scotland’s tax payers are not going anywhere, the wealth that would underpin the Scottish economy will remain and whatever currecny we use will be spent in Scotland based on that security.

 

Now that we know that all money disappearing is bollocks and that in the worst case we would be in an informal currency union, without the services of the Bank of England, for the short to mid-term (just as the Republic of Ireland was for fifty years after their independence) let’s look at what the economic consequences of that would be, for therein lies the constructive debate we should have had about the topic.

 

We’d have to extablish our own central bank and monetary policy shaping unit. Establish an exchange rate mechanism of some form for our new currency (pinned to another currency or a basket of goods) start printing the new notes (already done in Scotland by Clydesday, BoS and RBoS) and… er… that’s it as far as I can tell. It’s an extra expense to establish and run but because the country is wealthy this is not likely to be unduly problematic.

 

Why do I keep repeating that the country is wealthy? Because the not-very-well veiled fear that is being peddled is that loss of the pound will mean a loss of wealth. Establishing a new currency and central bank will be an expense but, just like the Bank of England, it will also be a new asset and just like any other currency it will be valuable for the service it will provide. It wont cause a loss of wealth. The wealth comes from the skills we have, the work we do and the resources we have at our disposal which of course includes oil but the cornerstones of Scotland’s wealth are the people of Scotland. What currency represents that wealth, either old or new, is not something worth being afraid of.

 

 

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Notes From an Even Smaller Island

Singapore Athletes

Team Singapore at the opening ceremony of the 2014 Commonwealth Games in Glasgow by Kua Chee Siong [Source]

 

A Brief History of Singapore

 

The circumstances of Singapore’s sudden independence forty nine years ago are worlds different from those facing Scotland now. Years of colonial rule by Britain, starting in the early 1800s, was interupted by Japanese occupation during the second world war but in 1945 the British were back in control. 1955 saw Singapore demanding full soverignty from the UK, but they were politely declined, instead more powers were ceded and by 1959 it had become a self governing state controlling all internal matters, somewhat like the Devo Max Scotland can’t have, leaving only defence and foreign policy remained under the rule of the British Crown.

 

There were two further hops to be made before full independence which in fact was never a stated goal of the ruling People’s Action Party; as a small island with no natural resources, a major industry of rubber production and only its fortuitous place on the world’s shipping lanes as a major asset, Singapore felt like a small boat in a very big ocean with much stronger powers and forces threatening her on all sides. The fear of potential oppression or adverse influence by stronger neighbours remains a feature of the Singaporean outlook to this day. The next step in 1963 was to sever itself from the United Kingdom, not for independence but to join the Federation of Malaysia.

 

The relationship with the federal government in Kuala Lumpur was fractuous from the start. Article 153 of the constitution, which remains highly contentious to this day, guaranteed extra rights to some groups of ethnic Malay’s. Although intended to protect and develop a vulnerable community, it effectively institutionalised discrimination against other races including those from a Chinese background which make up a majority in Singapore. Singapore’s efforts to change this and aim for a more inclusive Malaysian Malaysia, as opposed to a Malay one. This and other reforms were roundly rejected by the federal government who also feared the growing influence of Singapore with its expanding economy creating a source of wealth for the federation but also a threat to the primacy of Kuala Lumpur.

 

Just two years later, on 9 August 1965, Singapore made the last step to independence when it was ejected from the Federation and formed an independent sovereign state, adrift from colonial and federal powers alike and trusting only to the bonds of relationship as a commonwealth member and her own tenacity to make her way in the world.

 

Wee Red Dot

 

Singapore is just a wee red dot on the map; it has about the same total land area as Glasgow, Edinburgh plus a narrow column around the M8 in between but with 5.3 million people, the population size is much the same as Scotland. Even before independence, it had the third highest GDP in South East Asia but in the nearly fifty years since independence it has become the third richest nation (by GDP per capita) in the world with enormous monetary reserves and no sign of slowing down anytime soon.

 

That has not been a journey without uncertainties or problems. The currency used by Singapore was at first a formal union with Malaysia remaining from their membership of the federation. This broke down not long after independence leading to an informal union which was in place for many years after. In the mid seventies it switched to pegging its currency to the British Pound and then slowly transitioned over the following decade to pegging it against a weighted basket of goods. Today the currency is still pegged to an undisclosed basket of goods and is fully backed by her foreign reserves. None of these transitions caused little Singapore to sink beneath the waves – currency is just a way of measuring wealth, it is not wealth in and of itself.

 

Of course there were fears that Singapore would land outside of all sorts of other economic and political systems and be rendered a sort of pariah on the edges of true national legitimacy. No such thing happened, it maintained membership of the commonwealth, joined the United Nations within a month and helped found the ASEAN group of nations within two years as part of its drive to improve economic and political relations across the region.

 

Wee Blue Dod

 

The history and circumstances were very different, but the parallels for Scotland are there to be seen. Rather than being ejected from wider political communities, we should look to become leaders in Europe. Rather than being scared about the exact nature of our currency, we should look to our people and our wealth not the stick with which it is measured. Rather than fearing the great unknown, we can be confident that the problems we’ll innevitably have to face out on our own can be overcome and leave us stronger.

 

We’d be starting from a much stronger position than Singapore ever did, the ocean’s just as big but we can trust our wee boat to weather any storm. I look forward to being the son of one and resident of another country, both of whom can compete for the title of “best wee country in the world”.

 

 

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Why I Wish We Could Have Devo Max (and why we cant)

What Do We Want?

 

Back in 2011, the SNP said it would allow a third option, for more fiscal autonomy or “Devo Max”, on the devloution ballot [Citation]. Such an option was welcomed by senior Scottish Labour folks [Citation] and support in Scotland for more powers for the Scottish Parliament remains high [Citation] – if this option were on the ballot paper the outcome of the referendum would be pretty certain. Devolution has worked well in Scotland – having autonomy and authority over key policy areas like health and education has been a success and it is no surprise to me that more of the same would be desired and could bring further benefits.

 

Sadly an option for Devo Max is not on the ballot paper. The Edinburgh Agreement stipulated that an unambiguous result all sides would respect was, quite rightly, desired and it therefore chose the binary yes/no question on Scottish Independence. Devo Max would have had a hard time getting on the ballot when that agreement was reached; the Westminster Government would be unlikely to want the dilution of power this would require and the Scottish Government (though saying they were happy to have it on the ballot) had no compelling reason to fight to get it on there as this would split the vote away from independence. Finally, finding an option on which all parties could have at least broad agreement before making it onto the ballot paper would have smacked of pre-negotiation which is also antipathetic to the Edinburgh Agreement.

 

What Does it Look Like?

 

Let’s next take a quick look at what we might actually want when we say Devo Max and what options are actually on offer. At the most powerful end of Devo Max is Full Fiscal Autonomy which would mean that we scrap the Barnett formula and instead Scotland becomes responsible for the raising, administering and spending of all of her tax monies and we pay a levy back to the Westminster parliament for the remaining reserved matters which are basically just foreign policy, defence and whatever cross border quangos we need to pay our share on to keep the whole show ticking along smoothly. The second option is Calman Plus, in which we adopt a more chunky subset of the Calman Commission recommendations; gaining the power to vary some income tax rates and directly raising and spend other minor taxes (like air passenger and stamp duty), Barnett gets replaced by something new at some point to reflect the changes in taxes raised and spent locally and the Scottish Parliament can legislate on some matters which are notionally reserved but would then receive consent from the UK parliament. This would theoretically mean that we’d get a measure of control over things like social policy and welfare for example.

 

Either option sound like the sort of thing we’d conceivably want and if the balot paper had a second option along the lines of “Should Scotland gain more fiscal autonomy?” with the subtext that a negotiated settlement somewhere between those two ends of the spectrum was what was on offer, I think we’d have a winner already. Devolution worked well, let’s have more of the same, please.

 

For better or worse, these preferred options for most Scots are not on the ballot. So how should my enfranchised fellow Scots vote if they want Devo Max? Well there are two big problems that stand in the way: a Federal UK and the never to be answered West Lothian question.

 

Fully Fiscal and Federal

 

The fundamental problem with Full Fiscal Autonomy is that it is incompatible with the United Kingdom as it is currently constituted. We cant have Scotland become a federal state if we dont also do the same for Wales, Northern Ireland and a couple of different size and shaped chunks within England. Westminster would have to become the federal centre of the United Kingdom administering foreign and defence policy steering, EU and EC treaties and so forth, being a major London tourist attraction and nothing else.

 

Forming a federal UK would be a wholesale redrawing of the lines of power and you simply can not put that on a ballot paper that only the Scots get to vote on and there is little appetite within any of the establishment parties for such a change. Technically something like this is a Lib Dem policy objective, but nobody gives two hoots what they think anymore [Citation].

 

We’ve known for a while that we’d already pushed devolution pretty much as far as it could go without starting on a proper federal path. Shortly after Scottish Devloution, I moved to Newcastle just in time for the referendum in the North of England on a “devolved assembly” there. The canny Northerners, quite rightly, rejected that proposal for the expensive white elephant that it was; an assembly with the power to talk but neither the fiscal not policy power to actually affect very much change in anything. The New Labour devolution plan stopped dead there, after Scotland, Wales, Norther Ireland and the Greater London Authority we’d reached the end of the line.

 

West Lothian Devo Plus

 

Any further growth in devolved powers for Scotland, like Calman Plus, makes the thorny West Lothian question all the more prickly: Why should Scottish MPs continue to steer and vote on policy for things like English health matters when their constituents are largely unaffected? And the flipside of the coin, if Scottish influence should therefore be reduced in Westminster why should we lose say over devolved matters that still affect us? It’s not an unfair question but, asside from a Federal UK (see above), there is probably no fair answer.

 

Some recommendations from the Calman Commission have of course already been enacted and are coming into effect at this very moment in time in the form of the Scotland Act 2012. The West Lothian question is also being quietly answered with reductions in Scottish West Minster seats [Citation].

 

More Devo On Offer

 

The unionist parties have all pledged to increase powers in some form following a No vote, so let’s see what the Devo Max options on actual offer are!

 

The Labour Party’s Powers for a Purpose (PDF) is an extraordinary wee read, the lists of what they have decided on balance must remain reserved powers is long but there are two areas where they see room for expansion of powers: Enacting the Sewel Convention, guaranteeing that Scottish Parliament decisions are not reveresed by Westminster and administrative control of the Scottish Parliament’s electoral system. Beyond that the 10p Income tax variance that the Scotland Act 2012 already has gets upped to 15p.

 

The Conservative’s Strathclyde Commission (PDF) has little to offer apart from new tax raising responsibilites to improve fiscal transparency and accountability (OK, fair enough) but without any accompanying spending or policy making powers, which makes the offer more of a burden than an actual new power.

 

In short, the unionist parties have already played their increased powers card: the Scotland Act 2012 was it. Everything else being promised is, on examination, a little bit thin. Not even local social policy and welfare control are on offer and those are things we could really do with getting control of because I for one don’t want people starving in my country for the crime of being poor [Citation].

 

What Do We Want? How Do We Get it?

 

If Scotland genuinely wants something like Devo Max; more fiscal power and more areas of policy that come under the Scottish Parliaments control, there is only one way to get it: vote for independence.

 

What I consider the best option: Full Fiscal Autonomy within a Federal UK is just nowhere in sight. The next best option of significant new tax raising and spending powers and control of more areas of local policy are not on offer from the major UK parties.

 

Interestingly Boris Johnson’s latest gaffe [Citation] I partially agree with:

 

“What has England ever got out of this devolution process? If you want to have growth in the English cities then you should do what Manchester wants, what Liverpool, Leeds and all of us want – and that’s more tax raising powers.”

 

Exactly Boris. But here’s the rub, what you want there is hard to do without significant UK constitutional reform. Luckily for the Remaining UK, if Scotland becomes independent you are going to have a golden opportunity to address that problem because your old constitution will have to change (having a Scotland shaped hole in it). What England (and every other Brit outside Scotland’s borders) might get out of independence is the sort of reform that might actually give anywhere outside London and the periphery of the Westminster bubble the opportunity to grow.

 

 

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