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.