There have been some heavyweight salvos this week in the constitutional debate. From the YES corner we have Crawford Beveridge and his team drawn from the First Minister’s Council of Economic Advisers. This is without doubt a weighty contribution, full of decent analysis; if not a lot of repetition in case we missed the key messages!
The first report of the Fiscal Commission Working Group sets out a macroeconomic framework centred on three pillars:
· Monetary Policy – including the choice of currency and the framework for setting interest rates and the money supply to promote (‘price’) stability and minimise short-term volatility;
· Financial Stability – including the use of prudential regulation, supervision and resolution tools to ensure stability in the financial system; and,
· Fiscal Policy – including the setting of taxes, government spending and borrowing within an overarching framework of fiscal sustainability.
A key message is that under independence Scotland would control the levers that would give the country the flexibility to respond to the prevailing economic conditions. A positive example of this is immigration policy, although the implications for border controls are not explored in this paper.
This report sets out a very similar monetary approach to that outlined by John Swinney by keeping the pound within a Sterling zone and UK co-ordination of financial supervision. This includes “separating the link between the balance sheet of financial institutions and government”. The lessons from the “arc of prosperity” have clearly been learnt!
The fiscal recommendations are also similar, although it says more about the public spending implications of fiscal policy. It describes a fiscally conservative approach in the early years of independence in order to establish Scotland’s credibility as an independent nation. This very much reminds me of Gordon Brown’s approach as UK Chancellor in 1997.
The report recommends that, “in addition to boosting economic growth, the Government should explore and prioritise opportunities to address inequalities and to promote intergenerational equity and environmental sustainability”. That’s a fine objective, but the report goes on to link fiscal policy to the UK through a, “fiscal sustainability agreement with overall objectives for ensuring that net debt and government borrowing do not diverge significantly.”
On public spending the report recognises that the balance of Scotland’s relative fiscal strength depends heavily on revenue from the North Sea. Estimates of this revenue vary widely and are subject to worldwide price volatility. The Fiscal Commission recommends establishing a stabilisation fund from oil revenues that exceed current budget requirements to smooth out and future financial shocks. While this is a prudent measure as part of their fiscal framework it does limit the ability of the Scottish Government to tackle structural inequality. In fact the framework they propose would significantly constrain the ability of the Scottish Government to adopt an alternative economic strategy such as A Better Way advocated by the STUC. In essence it foresees a fiscally conservative approach that places market credibility above other considerations.
The Fiscal Commission’s approach to monetary policy has the same shortcomings I highlighted in last Red Paper publication. There has to be a huge question mark over the willingness of the rest of the UK (rUK) to enter into their proposed Sterling zone and to share governance of the Bank of England in the way the Fiscal Commission suggests. Even if that was possible Scotland would at best be a junior partner with a minority say over a key lever of economic policy. Handing over monetary policy to rUK also limits the scope of fiscal policy. We only have to look at the Eurozone crisis debate to see the link between monetary and fiscal policy. If the key economic levers are controlled by another country, then there is less influence on monetary, and fiscal, policy than under devolution.
The Fiscal Commission’s much vaunted flexibility under independence is looking more like a straightjacket for a future Scottish Government. It may help to make independence sound less threatening to the financial markets, but there is little for those who argue that an independent Scotland should be a radical beacon of change.
Cross posted at the Red Paper and there will be an opportunity to discuss these issues on Saturday at the Red Paper seminar. You can register here.