Scottish Independence: Be Careful What You Wish For

Scottish not British

This is a special piece about the SNP’s attempts for a Currency Union with the rest of the UK. It is flawed and the implications could be drastic. All patriotic rhetoric aside, the Scottish people should be careful of what they wish for.

Without question the potential breakup of the United Kingdom of Great Britain and Northern Ireland is a monumental and truly unique event. The Scottish people have been granted their request for the right as Scots to self-determination. This would result in much greater powers shifting away from Westminster and into the Scottish Parliament.

From an emotional and patriotic perspective their cries for independence are fully justified and understandable; the fact is Scotland was an independent nation a very long time ago. Most people in Scotland do not consider themselves British and feel disillusioned with the decision making process over four hundred miles away in Westminster. This is not a matter of mere geography, the distance purely emphasizes the point that they are culturally their own people.

It is this reason why the SNP have completely sold the Scottish YES campaign short by seeking a currency union with the England. If we analyse this call for ‘independence’ how independent can independence be if your currency; the common factor and medium that binds the market based society together, is determined by the same people you are claiming to want to leave? Surely that creates a more dependent nation than before?

Currency union is what the Eurozone is based on. Because the ECB (European Central Bank) controls all monetary policy (interest rates & supply of money) across the entire region. Nation states are rendered somewhat useless to self-determination when it comes to economic planning, specifically fiscal policy (government spending and taxation). Therefore, the ECB must always factor in contrasting economies when deciding what interest rates will be. Think of large economies such as Germany and France and then smaller economies such as Portugal and of course Greece.

Hypothetically, the ECB may raise interest rates across the Eurozone in order to curtail an economic boom. This could help the nations that are booming at a higher rate. Booming in the sense of higher and more potent economic activity. This is certainly possible when you look at just how different the economies are in the Eurozone. Some nations may benefit from higher rates of interest, whilst some may suffer. It will help some nations and hurt others.

This is a very realistic scenario for Scotland. All patriotism aside and let the facts dictate. Several businesses such as RBS, Lloyds, Standard Life and others have all stated they are in unwavering support of the Union and will leave Scotland if they get their independence. Firms such as Next and John Lewis suggest that Scottish versions of their stores could have to increase prices in order to maintain price stability with the rest of the union. Can you imagine Scottish people driving to Northern England just to save money for the same goods and services? This could boost England’s economy and deplete Scottish business in the long run.

There is a simple and rational solution and it is a genuine surprise that the SNP have not considered a fully independent Central Bank and Currency. Rather than seeking a currency union with the UK why not create your own? This is what a truly independent Scotland deserves. This hybrid, this poorly choreographed collaboration between two neighbours is not independence. It is dependence. This top-heavy relationship is highly unlikely to work for Scotland. As the evidence suggests for currency union in the Eurozone, (Greece, Spain, Ireland and Portugal) without fiscal AND monetary union determined by one single body tailored to the needs of your own economy there will ALWAYS be an imbalance. Mark Carney accurately described a currency union as “incompatible with sovereignty.” The SNP have however suggested a fiscal framework to avoid a Greek and Spanish like currency imbalance situation but it simply does not go far enough. The Union have made it clear what their view is and they want Scotland to remain. They have no obligation to make special arrangements for Scotland.

For true, unaltered and FULL independence Scotland require full control over both fiscal (government spending) and monetary (interest rates) policies. Without control over both Scotland need to ensure they have enough of a thriving and stable market to ensure their economic activity does not stray too far from that of England if they want to use the Pound Sterling. It will be very difficult to maintain that balance however, especially considering the unwavering stance from the Union.

Being Scottish is of the heart and mind and not necessarily of the ballot. Of course officially being an independent nation and having full national recognition is something to savour and for Alex Salmond, he gets to write his name into history forever. It should be approached with caution because the SNP’s approach lacks the real vision and authenticity the Scottish people deserve. If the Scottish economy does not create enough well paid and productive jobs in both short and long-run, if it does not open itself for real and beneficial investment then Scotland will suffer.

 

Good luck to the people of Scotland no matter what the outcome.  

 

Budget 2013

Continuity rather than change as the UK economy continues to stroll along sluggishly

It has been a week since Chancellor of the Exchequer George Osborne announced his 2013 Budget and the reaction has been quite blunt in all honesty. The reaction probably reflects the state of the economy, flat and underwhelming. Osborne has decided to bring in more cuts, looser monetary policy and he is even trying to create another housing bubble.

Before I analyse some of the key facets of the Budget it should be noted that youth unemployment is close to 1m, underemployment (the number highly skilled workers in low paid work) currently stands at 3.05m and the Bank Of England is warning the country of a triple-dip recession. Things look bleak to say the least. With the economy performing so poorly I was hoping (not expecting) the Chancellor to announce at least one policy that could galvanise consumers; a cut in the rate of VAT would have been ideal. Retailers were complaining about a lack of spending on high streets at Christmas, making things cheaper would incentivise spending simply by making things cheaper. This could provide some remedy to the economy that clearly needs a boost.

But it was not to be and Osborne made it clear he was sticking to Plan A, deficit reduction. Unfortunately spending as a percentage of GDP has actually increased since the Coalition took power and this is due to the increase in unemployment and therefore welfare payments. This accounts for the nominal rise in welfare payments such as Job Seekers Allowance, but the decline in real terms. Home Secretary Iain Duncan Smith announcing a 1% increase.

Plan A is not working to the dismay of Osborne and the Office Of Budgetary Responsibility (OBR). The fiscal watchdog, a body founded by Osborne in 2010 had to revise its growth figures again, predicting growth in 2013 to just 0.6%, down from its previous figure of 1.2%. This is not the first time the OBR has had to revise its growth figures, leaving me to wonder how they can be repeatedly making either optimistic or unrealistic forecasts for growth. In their defence there are obviously only predictions and forecasts should never be taken as a given, still, it does not bode well. A figure of 1.2% is hardly triumphant; let alone slashing that figure by half.

As I mentioned the deficit is actually rising, so the austerity medicine is not actually working…yet. It was always a long-term goal, the goal to reduce the bloated public sector and have the private sector replace the jobs lost, but that clearly is not happening. The current deficit stands at £120billion, so the debt-to-GDP is at 88% (IMF). In other words, the public finances are going to have to reduce significantly until we say any major fiscal policies exerted by the government, as the debt-to-GDP is very high.

Clearly Osborne’s policies highlight his and the government’s stance on fiscal policies. But with the economy is such disarray there will be some avenue to try and stimulate the monetary side of the economy and this is the reason why Osborne has refreshed the Bank Of England’s mandate. In an attempt to provide more room to maneuver the Bank of England will now be a little more flexible in it approach. Perhaps the biggest change in the Bank Of England’s mandate is something known as “explicit forward guidance” whereby the MPC makes a pledge to keep rates very low over a designated period. This should give markets more confidence due to the stability announcements should provide. It should also grant consumers with sufficient information about interest rates on loans, if rates remain low it should encourage more spending. These outcomes remain hypothetical and over time, the Chancellor may refresh the remit. In my opinion, the policies may be ineffective. If you look at the current interest rate, it has been at a record low level of 0.5 % since March 2009 and that still has not added much to market confidence. This situation resembles Japan in the early 1990s. Not only can predictions be made about the interest rate, but the evidence given highlights that it does not always translate to increase in spending, despite the low level of interest attached. We could even be in a liquidity trap, a state in an economy where monetary policies have no effect on growth. The interest rate has been 0.5% since March 2009, since then the Bank Of England have tried to boost the economy by buying government debt, quantitative easing, which is monetary policy. Growth has remained very low and the policies do not appear to be working.

The Chancellor also announced a new policy known as the “Help to Buy” policy, which is designed to protect banks against losses on high value mortgages. Politically, it may look good, but economically there are questions. It sounds like a government funded credit bubble. Whilst I do not think it will resemble anything like what we saw during the Blair days of the economy being pumped full of toxic mortgages. As time elapses, the scheme will undoubtedly become clearer. It may even provide the boost this economy so desperately needs.

In all honesty this Budget has confirmed that the UK has a long road ahead in terms of a tangible growth. The economy continues to “grow” at a disappointing rate and there are more cuts to come. Despite the cut in beer relief, the cut in cooperation tax that benefits large multinationals more than small or medium sized ones, this Budget has reflected the mood of the economy. It has been flat.