Head of Policy and Research Dr Craig Dalzell writes an open letter to Derek Mackay in response to his recent endorsement of the Growth Commission report and his motion to the SNP conference.
Dear Derek Mackay
I read your recent article in The National (6th April) with interest. Particularly your endorsement of the motion being put to the SNP conference this month as â€œyourâ€ plan, building on the Growth Commission. This direct endorsement gave me hope that you would have taken the opportunity in your article to tackle the now widespread critiques of that plan.
Your direct endorsement of the Growth Commission proposals also led me to the realisation that unless things change, you as Finance Secretary will be personally responsible for this plan and its consequences. In this spirit, I would like to address you directly regarding some of the critiques raised.
The big one, as raised by Robin McAlpine in The National last week (30th March), is the problem of what happens to the Scottish economy if we’re Sterlingised that is, we continue to use the pound without a formal currency union and the rUK economy tanks.
Without the powers to create (or destroy) money, apply Quantitative Easing, adjust interest rates, adjust exchange rates and, crucially, without the Bank of England having a legal remit over Scotland to do it for us, what powers would a Sterlingised Scotland actually have to shield us from the effects of an rUK crash?
This is not merely a hypothetical. The UK has suffered a recession in every decade of the past the century bar one (the 1940s) and we’re still suffering the â€œlost decadeâ€ from the 2008 Financial Crisis. Let’s be honest, your plan isn’t going to meet the â€œsix testsâ€ within the first Parliamentary term and we all know it so the results of the vote at the end of that term is a foregone one. Following the Growth Commission model of not having a currency for the decade or more that those tests imply presents a major systemic risk to the Scottish economy. You will surely understand that this is not a problem that can be solved by tweaking tax rates.
Derek, you are quite correct to point out that currency is a servant of the economy but it’s not true to say that the reverse doesn’t also apply. The relationship is one of mutual feedback. The currency shapes what kind of economy is possible. It’s notable that you and the Growth Commission are keen to point out that many of our comparator countries don’t have their own currency. What you seem less keen to point out is that all of them are Eurozone members. None of the comparator countries cited in the Growth Commission report unilaterally use the pound, euro, dollar or another currency. Read section A3.21 of the report if you don’t believe me.
It’s the placing of limits on that range of economic possibility that is proving concerning to many. Under the Growth Commission’s wider economic proposals, there are measures to keep Scotland’s financial regulations tightly tied to the UK’s failed model not just at the point of independence but as the UK continues to make changes to their regulations afterwards. Scotland’s political input into the Union may be slight at the moment. We may so often be ignored. But at least, on paper, UK-wide regulations are made with Scotland’s say and to cover Scotland’s needs. Post-independence, your plan makes as much political and economic sense as unilaterally adopting changes to the financial regulations of Singapore. It is a plan built to appease those who would be loaning Scotland the money that we couldn’t print on our own. They will not easily give up such a valued client’ – hence why the â€œsix testsâ€ take the nigh-impossible-to-meet form that they do.
I understand the desire by some to campaign for a â€œsoft independenceâ€ model. It’s not my preferred model. It’s not the model favoured by just about any SNP member I’ve ever met. It’s certainly not a model anywhere near compatible with the â€œScotland in Europeâ€ policy espoused by the SNP. Put aside the â€œwe’ll be forced into the euroâ€ arguments. We won’t be getting back into the EU at all if we don’t have control of our own currency nor if we follow the rUK’s â€œGlobal Britainâ€ financial regulations into an ERG-led tax haven on (non-EU compliant) steroids. Such a â€œsoft independenceâ€ was compatible with â€œScotland in Europeâ€ in 2014 but that compatibility ended in June 2016. Scotland doesn’t necessarily have to choose between the UK and the EU, but we can no longer have both.
This all said I do understand the desire for the â€œsoft independenceâ€ model. If this truly is the economic path that you want to follow then, by all means, launch a Scottish currency and peg it to the pound. Maintain that close link to rUK and make the case to the Scottish people for the need to mirror changing rUK financial regulations. A Scottish currency pegged to the pound would be easy to change in a crisis (or outwith one) compared to moving from Sterlingisation to a Scottish currency. The experience of Switzerland and the Czech Republic during the Eurozone crisis makes that clear. Our own currency allows Scotland to actually harness the powers of independence to forge the Scotland that we want to see, not to be trapped in one defined by the arbitrary tests we apply to it. Do this in a democratic way and you’ll build the Growth Commission vision of an independent Scotland. But do not do this at the expense of other voices and other visions. Allow them the space to campaign alongside yours and let the Scottish people decide which journey they want to take.
The time for discussion within the SNP is almost over. The party will soon have to bring the wider public into this discussion. I have every confidence that the party will make its decision this month with the full knowledge of the consequences of it. If we want to build the fairer, more equal country that we all want, then we have to make sure that Scotland has the tools at its disposal to be able to do so. To have the best economic case to put to the people, then win, we HAVE to secure the powers necessary to deliver the more prosperous and fairer Scotland we seek. An independent Scotland needs its own currency.
Dr Craig Dalzell
Head of Policy and Research – Common Weal