Better Together they say. Aye, but who for?

As Scotland heads towards the most momentous day in our modern history the decision that we have to make comes down to a very simple and fundamental choice. This simple choice is being made to look so very complicated by those who would wish to create lack of clarity, to create uncertainty, to create doubt, to create fear.

The question on the referendum ballot paper is “Should Scotland be an independent country?” The Yes campaign has endeavoured, at every turn to offer positive positions to answer this question but at the same time the positive message is underpinned by warnings of what can be taken away from us that we possess already if we remain in the Union.

Coming from the opposite locus the Better Together No campaign has preferred to offer a diet of half and quarter truths – sometimes outright lies – which are always presented in splendid isolation to prove that independence is not just undesirable but it is barmy, plain and simple! Any attempt to accuse the Union of being perfidious in any case is ridiculed and howled down as outright propaganda and nonsense.

Let’s examine a very specific example of this in the favourite current battleground – the NHS.

“Yes” claims that if we remain part of the Union then the privatisation rampant in NHS England will be foisted upon NHS Scotland due to funding cuts – very possible indeed. BT claims that this is stuff and nonsense. Health is a devolved issue – that is true. However what BT fail to mention is that the budget for NHS Scotland is arrived at by the Barnett Formula and if NHS England’s budget is cut or fails to meet inflation then NHS Scotland’s budget will mirror that.

And there we have it. BT state the complete truth that health is a devolved issue but then take every step to stop the argument dead at that point because when the funding formula is introduced then suddenly it’s only a half truth. They just don’t like joined-up-thinking as that involves analysis and scrutiny which don’t hold water.

But let’s go back to the basic premise of the No campaign – we are Better Together. OK, but who is Better Together? Us Scots or the rest of the UK? We will contend here that Better Together is a hypothesis that helps Westminster immeasurably more than it helps Scotland.

Consider the figures that have been doing the rounds on social media in the last couple of days. Scotland has 8.3% of the population of the UK. The other parts of the UK constitute 91.7% of the population and we are a measly 8.3%.

Scotland has 32% of the land area of the UK but large parts of the territory are only marginally inhabitable so we’ll not fight too much on this issue. However that’s one of the few areas that that are not up for debate.

Scotland has 90% of the UK’s surface fresh water. Large areas of England and Wales are regularly declared to be in drought and the water distribution system south of the border is in severe disrepair due to lack of investment by its private owners. 90% among only 8.3%. Who is Better Together?

Scotland has 61% of the UK’s waters in its exclusive economic zone. If Scotland becomes independent the UK loses well over half of its EEZ. 61% among only 8.3%. Who is Better Together?

Scotland’s EEZ is home to 65% of UK offshore natural gas production and 96.5% of UK offshore oil production. 65% among only 8.3%. Who is Better Together?

Scotland supports 47% of UK opencast coal production. 47% among only 8.3%. Who is Better Together?

Scotland sits on 81% of all unexploited coal reserves in the UK. 81% among only 8.3%. Who is Better Together?

Scotland is covered by 46% of the UK’s forests. 46% among only 8.3%. Who is Better Together?

Scotland contributes 62% of UK timber production. 62% among only 8.3%. Who is Better Together?

Scotland supports 92% of UK hydroelectric generating capacity. 92% among only 8.3%. Who is Better Together?

Scotland supports 40% of UK wind, wave and solar electricity production. 40% among only 8.3%. Who is Better Together?

Scotland enjoys 60% of UK landings from Scottish registered fishing vessels. 60% among only 8.3%. Who is Better Together?

Scotland enjoys 55% of UK landings from fish caught in the Scottish EEZ. 55% among only 8.3%. Who is Better Together?

Scotland rears 30% of UK beef breeding stock. 30% among only 8.3%. Who is Better Together?

Scotland rears 10% of the total UK pig herd. 10% among only 8.3%. Who is Better Together?

Scotland supports 15% of the UK’s cereal crops. 15% among only 8.3%. Who is Better Together?

Scotland supports 20% of the UK’s potato production. 20% among only 8.3%. Who is Better Together?

We have asked the question, “Who is Better Together?” fifteen times and in each case the answer has to be the UK. And these are only a handful of the sectors in the complete picture. We don't scratch the surface of wind, wave and tidal generating potential. We don't mention whisky at all. There's no need to rub it in too much or we could be here all day.

The facts are this. Westminster desperately needs the resources of Scotland to plug as many of the leaks in the UK system as possible. But even with Scotland’s contributions to the Treasury, the Chancellor of the Exchequer’s policies – which are “working” we are told repeatedly – are haemorrhaging £1 billion to the UK national debt every week. With the Labour Party agreeing that the Coalition’s economic policies of austerity are the only way to go then we can expect more of the same if Ed Balls would replace George Osborne. Without Scotland’s contribution £1 billion per week will seem like the good old days.

The land that is Scotland is massively rich in resources not only in terms of the wider UK, not only in terms of the EU but actually in global terms. Condensing that into resources per capita the ability of Scotland to stand as an independent and successful country is almost obscene. Many countries are regarded as wealthy for enjoying only a handful of the fifteen factors we affirmed above. Maybe even with only two or three of those factors.

For Scotland now, it is up to us all to work out who or what is Better Together under the circumstances. If we have these means, which we do, then we can very adequately look after all of the other aspects of statehood without batting an eyelid.

We have to realise that Better Together is not an expression of hope for Scotland, it is a plea of desperation from the ConDem Coalition in Westminster that their proxies in Scottish Labour can pull off one more great lie. 

Not this time.

Counting Red Herrings

“What is your Plan B?” was the cry. “What is your Plan B?”

Alistair Darling was most insistent that without knowing the second preferred currency choice of Alex Salmond then the whole package offered by the pro-independence Yes campaign was worthless. What a revelation! Scotland was left slack-jawed and still hasn’t got over it more than two weeks later.

What are we to make of this lack of planning? What are we to assume about the implied dereliction of duty by the Scottish Government and specifically by that éminence gris of Better Together, the First Minister.

I am going to make a statement that will have the No campaign howling with derision but is a truism for all its apparent contention.

“It doesn’t matter what currency Scotland uses after independence.” Have you got that? Are you suitably taken aback? I’ll say it again just so that you can be sure that you read this correctly, “It doesn’t matter what currency Scotland uses after independence.”

OK, I will admit that this is a rather glib statement if taken in splendid isolation but that is how Better Together love to operate – take one single strand of a policy, strip it bare and use that as incontrovertible proof that the whole independence argument is a house of cards set to topple in on itself. So I have taken this simple statement and thrown it down as a means of capturing some attention. But more on that later.

Now, let’s just consider all the evidence. “What is your Plan B?” was the question posed by Alistair Darling to Alex Salmond. In the White Paper Scotland’s Future if we refer to pages 109-117 we will quite clearly see that the options are laid out with the preferred choice being a currency union. There are also Plans B, C and D offered but for the sake of Darling I will list all the options:

1.     Currency union,

2.     Sterlingisation,

3.     Scottish currency,

4.     Euro.

Other than currency union, which we all know the story of, the option that has been given the most mileage in the media is sterlingisation which is the unilateral adoption of sterling without a currency union. Better Together scorns this because it would put Scotland in the same boat as various “banana republics” such as Panama, Ecuador and El Salvador – all countries that unilaterally use the US dollar as their currency. I believe that Better Together is missing a trick here – they could have added Zimbabwe to the list! Cue all kinds of comparisons between Alex Salmond and Robert Mugabe! But I digress.

One thing which Better Together fails to point out is that there are further unilateral uses of other currencies out there in the wider world – it’s a common occurrence in fact. Would you believe me if I told you that the country with the highest GDP per capita does not use its own currency and unilaterally uses a major world currency? It’s completely true. That country is Monaco and it uses the euro. But that doesn’t suit the Better Together narrative, as Monaco is a country which permits low taxation and massive wealth to exist side by side.

The option of a new Scottish currency is remarkably underplayed to my estimation. This can be a virtual equivalent of sterlingisation under some circumstances. The first question would be “pegged or floating?” The logical way to go would be to peg the new currency and probably against sterling at an exchange rate of 1:1. A Scottish Central Bank (SCB) would need to ensure that it had the money supply covered in Bank of England tender which would now take on the role of foreign exchange reserves. The currency is covered, press the button, go. But this is another banana republic option isn’t it?

Or is it. Let’s see have a look around the world and see which Mickey Mouse currencies are pegged to a fixed exchange rate. The Bhutanese ngultrum is pegged to the Indian rupee. The Brunei dollar is pegged to the Singapore dollar. The Swazi lilangeni is pegged to the South African rand. The Danish krone is pegged to the euro. Whoa! Hold it right there. That’s not a banana republic by any stretch of the imagination. No, the Danish Krone is pegged to the euro through the ERM II process. So it seems that there is least one respected currency out there which is pegged.

Did you know that the Hong Kong dollar is one of the top ten most traded currencies on foreign exchange markets? It is, but the Hong Kong dollar is fixed to the US dollar by a currency peg and has been since 1983. Who would have believed that?

The other way to go with a Scottish currency would be to have it floating on exchange markets. This can be achieved in various ways. The currency can be allowed to float without restriction or there could be a pegging mechanism where the currency is permitted to vary by a percentage against a baseline currency or against a so-called basket of currencies within a fixed band up or down. Then it is the responsibility of the SCB to apply the state’s monetary policy to control the variance in the exchange rate.

The euro option is the least likely for now. To join the Eurozone a country must first sign up to ERM II and then demonstrate the ability to manage their own currency within the constraints of that agreement for at least two years. Then euro membership can be negotiated. This would necessitate the previously mentioned Scottish currency operating within a fixed exchange band with the euro. Only after completion of this process would Scotland be accepted as a full euro member.

The final option would be unilateral adoption of the euro in the same manner as sterlingisation.

“What is your Plan B?” That is the biggest red herring in Scottish political history. It’s all there to be read and understood.

The actuality now is that we have drilled into Plans A, B, C and D and come up with A, B, C, D, E and F. But that’s splitting hairs. The reality is that beyond Plan A there is an entire array of logical and workable options that the Scottish Government could choose to adopt following a Yes vote on September 18. The choices are there to be seen and to be made.

Possibly the grandest deceit being practiced by Better Together vis-à-vis the currency arguments is the mantra that if you are officially linked to another currency by union or by unilateral use then it is impossible to exercise the levers of the economy required to create any differentiation from the other, larger part of the relationship. 

For Alistair Darling to use this mantra and to promote it widely is to be knowingly malicious. As a former Chancellor of the Exchequer he knows all about monetary policy – the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability. He will also know not to confuse that with fiscal policy – the use of government revenue collection (mainly taxes) and expenditure (spending) to influence the economy. Alistair Darling happily conflates the two different areas of policy into one lump when he knows very well that linked currencies would certainly have to aspire to the same monetary goals but fiscal policy could vary wildly.

There are plenty of ready examples easily at hand to demonstrate this to be the case. The Eurozone sees 18 countries – 19 when Lithuania joins in January 2015 – pool their monetary policy through the ECB but conduct very different fiscal policy aims. Rates of personal income tax, corporate tax, value added tax, capital gains tax, … they vary from country to country as each member positions itself to take best fiscal advantage of its economic conditions. Why would this be any different for an independent Scotland in currency union with the rUK?

Quite simply it wouldn’t be any different. Monetary policy would, to a greater degree, be set by the Bank of England but responsibility for fiscal policy would sit with Holyrood. If Scotland chooses to be business friendly and cut corporate tax then so be it. If we choose to slash, or even abolish, Air Passenger Duty then it will be done. If the Scottish Government decides that Inheritance Tax is an anachronism and should be scrapped then that’s how it shall be.

But the continued and oft repeated weasel words of Alistair Darling and Better Together are being given an unquestioned and unquestioning stage by the media in Scotland and in the rest of the UK.

The preferred option since the publication of the White Paper has been a currency union with the rUK. This has been and remains the official position despite all forms of political intervention from the three main Unionist parties. Make no mistake though, this is political intervention. As Nobel laureate Professor Joseph Stiglitz pointed out on August 20^th, Westminster’s position is purely political posturing for the purposes of affecting the outcome of the referendum. As he further concludes on Scotland, “Once they get independence, if that happens, then I think there would be a very different position.” Professor Stiglitz has forgotten more about economics in his 71 years than George Osborne will ever know and yet it’s Osborne who thinks he has the whip hand in fiscal matters.

There have been rumblings that if currency union is not permitted by Westminster then Scotland could abdicate responsibility for the share of debt accumulated by the UK government on Scotland’s behalf. Quite frankly this is probably as legitimate a bargaining position for the Scottish Government as is Westminster’s of denying a union. It is quite traditional for parties to a round of negotiations to come to the table with rather a radical starting position. Then a compromise must be sought. The matter of what equates to an asset of the UK is up for dispute as the Scottish Government’s viewpoint is that sterling is indeed an asset whilst Westminster sees it only as a functioning part of what is now and what will remain in the future as the UK.

The two sides are well apart but matters such as UK national debt nudging £1.3 trillion and increasing by £1 billion per week is a key issue for all concerned. For the sake of round numbers Scotland is indebted through Westminster’s benevolent hand to the tune of approximately £118 billion with that figure going up by around £93 million every week. Just for your information, the Treasury in London keeps telling us that the UK is in recovery but somehow it still manages to add £100,000 to national debt every minute of every day. If that’s regarded as success I would hate to see the Chancellor’s definition of failure. But this simply demonstrates that there are two sides to every story although the Scottish media tends to keep quiet on one of those sides.

Could Scotland walk away completely from the national debt? The answer is undoubtedly yes. That’s an undesirable endgame but it’s a potential outcome. Westminster would simply not be permitted to swallow that outcome though so a compromise would be forthcoming. The most likely compromise would be currency union. Professor Stiglitz knows how the world works but then so does Alistair Darling. He knows full well that there must be give and take. But he will never admit that and wraps up his Better Together rhetoric in a cloak of certainties which is as convincing as the Emperor’s New Clothes!

If the Scottish Government did walk away from the negotiating table and wash it’s hands of the national debt then the potential to start a new country from scratch but debt-free might be seen by many as an optimal position. Plan A would be out the window but B, C, D and the rest would be in focus.

So I would therefore modify my opening statement:

“It doesn’t matter what currency Scotland uses after independence for the moment.”

What’s the difference now? The difference is that we are not in a position to judge the best potentialities until we have the full range of true postures established. Will the Unionists insist on political dogma over economic prudence? If that is the case for the rUK then every man for himself and the devil take the hindmost! We will only know the best currency scenario when all the cards have been played. An independent Scotland could easily manage to thrive with any of the currency scenarios. Sound fiscal policy (and if necessary monetary policy as well) will see the economy through to the desired end. Be sure of one thing, the White Paper was not penned by one man in a stream of consciousness. No, instead it was put together after a vast amount of consultations with experts in every field – Professor Stiglitz was one of many – and when those contributions were completed the whole exercise was costed.

Scotland’s Future most certainly can be seen as a huge and all-encompassing exercise in joined-up political and economic thinking, the likes of which have scarcely if ever been seen in the modern political arena. The risks and the potentialities have been, to the largest imaginable part, taken into account. The sums do add up and do you know what? It doesn’t matter what currency we use as all the outcomes can be favourable.

But Alistair Darling does not want us to be counting on what is established in the White Paper; he wants us to be counting red herrings.

Hey Alistair, what’s your Plan B if the rUK has to service £1.3 trillion of debt all by itself? Hey Alistair, what’s your Plan B for basing your Trident submarines with their WMD’s? These are not red herrings, these are substantial and critical questions for Westminster that they cannot afford to have to find answers for.

Currency Plan B? Relax, it’s not important.

Heading for the Brexit – Unbelievable Opportunities for Scotland's Banking Sector

Pursuant to the article published on the Financial Times’ website on August 17^th – US banks plan ahead for UK exit from EU – we should take a little time to explore the implications of what a Brexit (British EU exit) might mean for the Scottish financial sector.

The article proceeded from the premise that should the UK vote to leave the EU then the major foreign banks, especially those from the US, would be motivated to move their European operations to another EU jurisdiction. The favourite destination mentioned was Dublin with the three main selling points being that Ireland is an English-speaking country, it uses the euro and there is absolutely no risk of it leaving the EU. That’s a fairly straightforward choice proceeding from the logic of the options available today.

However, let’s consider what can occur between now and 2017, the probable earliest date of any in-out referendum on the UK’s EU membership. Let’s do some thinking out loud and see where that leads:

1.     Scotland votes for independence,

2.     Scotland and the rUK agree a currency union,

3.     Scotland negotiates EU membership,

4.     Scotland becomes independent,

5.     The rUK votes to leave the EU – Brexit.

Point one is simple and that’s what we believe will be the outcome on September 18.

Point two is the logical conclusion to the on-going arguments between Edinburgh and London – once independence is assured there will be bigger matters to deal with and currency union will be a trade-off somewhere along the line.

Point three is now pretty much agreed as being on the agenda after a Yes vote.

Point four is the ending of the process started by the referendum.

Point five is a realistic assumption based on the way that England feels just now. The Conservatives are the only party to have promised an in-out referendum up to now but we can be relatively confident that Labour will offer exactly the same before the General Election in May 2015. What the LibDems may wish to offer is about as irrelevant as they have become as a party and UKIP will see an in-out referendum as the absolute minimum requirement to back any government in Westminster at all. So an EU referendum is pretty much a racing certainty. Based on this scenario there is a very realistic chance that the rUK will vote to leave the EU.

So for the big banks considering alternatives to being based in London is a logical and mature act.

The game changer to the FT article though would be an independent Scotland. This would be an alternative domicile for these banks. The language position is the same as with Ireland as would be EU membership and if we are dealing in sterling then the banks will not need to redenominate the currency of their commerce – it will be business as usual but with the address moved 400 miles up the road. Allied to that Edinburgh already has a mature financial industry so there will certainly be eager and experienced hands for the banks to employ. Undoubtedly this would also spark a wave of highly qualified immigrants from the City of London but that would be no hardship.

One thing that we have not taken into account yet is how the currency union might work on a technical basis. Currently the three Scottish banks that issue their own banknotes have their currency liability covered by Bank of England tender. The issuing banks do not just manufacture money out of thin air – for every Scottish pound that is printed and issued there must be an English pound held back in reserve. Thereby the Scottish notes are guaranteed. Following the independence vote it will probably be regarded as reasonable and necessary for the Scottish Government to establish a Scottish Central Bank (SCB) and one of the tasks of that institution could be to hold the guaranteed backing of the notes in circulation. By holding the currency reserves the SCB would be guaranteeing the notes issued to the Bank of England on behalf of the Scottish state.

So now back to the big foreign banks potentially heading up to Edinburgh. Of course there is no guarantee that all the banks would head in one direction and it might be logical and desirable for a dispersal of the banking industry around several financial centres such as Paris, Frankfurt and Amsterdam as well as Dublin and Edinburgh. Nevertheless Edinburgh would have many attractions as mentioned above but also when we bear in mind that between 11 to 12 per cent of all currency trading is done in sterling it might be reasonable and logical to have a trading floor in the sterling zone and to be able to make sterling settlements in the same domicile as the bank. The large banks have US dollar, euro and Japanese yen provision taken care of so it would seem smart to cover sterling in the same manner but also from inside the EU which critically gives the automatic passport to carry out services in all member countries.

On the one hand if London would lose this huge amount of financial business from the City there would certainly be consequences with the stability of sterling. If on the other hand that business would remain in  the sterling zone but on the other side of the currency union then Scotland’s banking sector would lend much needed stability back to sterling. A currency union works both ways. At the moment it’s viewed as London being stuck with having to guarantee Scotland’s debt but in reality Scotland could very easily end up being the guarantor of sterling’s continued credibility.

Then there is the not insubstantial matter of currency transfers and correspondent banking. When a foreign bank sends a transfer to another currency zone – for the sake of argument a Finnish bank sending euros to a sterling account in the UK – the initiating bank in Finland will have a limited scope for landing that transfer in the receiving country as they will have correspondent banking facilities – a correspondent account – with only a small number of banks in the UK or even only one. In the case of Nordea Bank in Helsinki all their sterling business hits the UK through HSBC in London. Then from HSBC the payments radiate outwards to the intended receivers across the UK. If Brexit occurred there is absolutely no guarantee that the rUK would join the Single Euro Payments Area (SEPA) as the UK is now in. However Scotland would be in SEPA as an EU member. Therefore there is a decent likelihood that Scottish banks would be more integrated with other EU institutions than their kin down in the rUK. Taking this to a reasonable conclusion there is every probability that Scottish banks would then find themselves with the lion’s share of the correspondent account business for at least the majority of banks in the Eurozone and the rest of the EU. Very tasty business indeed.

Overall then, the Brexit scenario could be a very invigorating boost for the Scottish economy in general and the banking sector in particular. Scotland could very well end up being the saviour of sterling. Now who’d have thought that when Alistair Darling was banging on about a Plan B? 

Pensions in an Independent Scotland: Part 2 (plus a word on Inheritance Tax)

In February we sent a letter to the Scottish Government expressing ideas on some reforms over pensions and inheritance tax. This seems as appropriate a time as any to offer those ideas to a broader forum.

I've been musing over various issues that seem to be ripe for exploitation in the battle over fiscal policy. Specifically I have been considering Inheritance Tax and Private Pensions. I believe that tapping into the correct sentiment in these spheres could consolidate very useful voting demographics for Yes.

Firstly Inheritance Tax. It was a manifesto promise of George Osborne to raise the IH threshold in "this Parliament" but that seems to have been conveniently forgotten about along with many other promises. This has been much to the annoyance of the Home Counties Blue Rinse Brigade – the traditional pack-mules of the Conservative Party election effort. I know this from personal experience as a dear relative of mine is part of that set and the disappointment among the elderly Tory cohorts is manifest.

I would imagine that it would not take an economic colossus to be able to piece together a viable argument for the scrapping of IH on the basis that its collection equals or even exceeds the take. This was found to be the case in Australia and New Zealand. In London and SE England the IH threshold is fearsomely close to so many families but in Scotland it is a far less universal threat. However those of retiral or near-retiral age with personal estates of reasonable value could be induced to look favourably on Yes if their immediate family would be freed from punitive penalties on the event of their own death.

Secondly personal pensions. I would suggest looking at two separate issues in the PP area.

a) International annuity purchase

b) Intergenerational pension funds

Regarding annuities the situation in the UK is currently pretty much stacked against the owner of the pension fund. Unless he received sophisticated advice or has a very high value fund the possibilities of shopping for an annuity outside the UK is very limited if not impossible. The potential returns from annuities purchased in other EU jurisdictions e.g. Luxembourg, are rather higher than those generally available in the UK. Also HMRC regards transfer of a fund outside the UK as some form of betrayal of the state due to the UK tax relief attracted by the fund in the first place. This kind of negates the principal of the Single Market in the first place. Surely if UK annuities were worth purchasing then foreign PP fund holders might seek out their terminal investment on these shores. But no. That is not going to happen any time soon.

My suggestion would be a policy guaranteeing PP fund holders the freedom to purchase an annuity anywhere in the EU. Unfortunately this would not help those already in receipt of their PP but it would be an excellent opportunity to attract those nearing retiral, or frankly at any age below that, to look favourably on Yes.

The idea of an intergenerational pension fund is this. When someone has a PP there is the possibility that his/her spouse can benefit from that fund once the PP holder has died. The new proposal would be that, in any and every case, when the beneficiaries to the PP have all passed away and there is a balance left in the fund then that balance should be transferred tax-free into the pension funds of the offspring of the family. It might be the case that it is a drop in the ocean but it could also be a six figure sum which is a tremendous boost to the PP fund of someone some distance away from pensionable age. Of course we can expect the annuity providers to squeal for all they are worth but it would be some steps towards equitable settlement for the poor PP holder who dies before his/her time. This will attract, in my opinion, the same voting demographics as above.

Wilfully populist some might say but logical reforms to my mind.

I do hope that you will give some consideration to what I have written and I hope that it may assist in fighting the good fight! Equally, I do not want to come across as presumptuous and if these matters or similar are already on the table somewhere then I apologise for going over old ground.

Any and all original ideas stated here are those of the Scottish Economic Analysis Unit and do not knowingly reflect the policies of the Scottish Government or any political party or trade union.