Hopefully come 2021 we will be in a position to hold elections again, which must mean a return of focus to our message in Scotland. What’s our message and why is it both unique and important for the people of Scotland?
In 1992, James Carville was a strategist in the successful Presidential campaign of Bill Clinton. Carville hung a sign in Bill Clinton’s Little Rock campaign headquarters that read:
- Change vs. more of the same
- The economy, stupid
- Don’t forget health care
We know fine well where both the SNP and Conservatives stand in their message going into next year’s election, it’s a straight fight between IndyRef2 and Unionism. The Scottish Liberal Democrats can cut through all that white noise by sticking to Carville’s sign.
In 2014, independence campaigners failed because they couldn’t produce a clear and credible economic narrative. I find little evidence to suggest that narrative has found new ground, in fact quite the opposite. There is a crude reality for IndyRef2 supporters and it’s the price of crude oil.
In 2014 the price of crude oil was over $110 per barrel and was the economic basis for the ‘White Paper for Scotland’. At the beginning of this year that price fell by a half and then stabilised at roughly $60 per barrel; the industry itself survived on a round of deep cost cutting and slashing employment in the North Sea on a large scale.
Then we enter our current situation, a global pandemic and the recession that is likely to come with it. Demand has plummeted by 21.5m barrels per day in comparison to similar period in 2019, year-on-year demand is expected to show a drop of around 8 per cent. Production exceeds consumption, pushing more and more oil into storage. The likelihood is that mass storage will overhang the market for potentially years to come, we will not see a return to 2014 price levels for potentially a decade or more.
So where does this leave the Scottish Liberal Democrats?
I believe we quite adequately resolve all three points Carville laid his hat on with our Federal narrative.
- In remaining a constituent nation of our United Kingdom we benefit from a heavyweight global economy.
- In pushing for additional powers to the Scottish Parliament we can continue to resolve our social challenges.
- Our ability to spend roughly 10% higher than the UK average on public services, we should theoretically have a better health, education and transport service in Scotland.
However, with a country squeezed between an SNP government, which refuses to invoke the powers it has already, and a Conservative party, that wishes the maintain the status quo, we will not tackle the real issues which bedevil Scotland currently.
The Scottish Liberal Democrats will use appropriate powers where necessary to tackle problems in Scottish society and push for further devolution, while maintaining our ties to the worlds 6th largest Economy. That’s our unique sell and never forget it.
* I'm a Liberal Democrat member having joined last year from Labour, I was previously Chair and Founder of the YF Devolution and Local Government Committee
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“In pushing for additional powers to the Scottish Parliament we can continue to resolve our social challenges”……… “The Scottish Liberal Democrats will use appropriate powers where necessary to tackle problems in Scottish society”.
Exactly which powers and problems are you referring to, Mr McKenzie ? Could you be a bit more specific, please ?
am puzzled as to where the tax revenue comes from that enables Scotland`s ” ability to spend roughly 10% higher than the UK average on public services ” ; an explanation would be helpful please !
@ Duncan Greenland Good question but the % is debatable. Two answers :
1) The Barnett formula 2) Slightly higher tax rates in Scotland. (see below)
Basic rate
In England, Wales and Northern Ireland tax is payable at the basic rate of 20% on taxable income up to £50,000. In Scotland tax is payable at three different rates (19%, 20% and 21%) on taxable income up to £43,430.
Higher rate
If you live in England, Wales or Northern Ireland and you have taxable income of more than £50,000, you will have to pay the higher rate of 40% tax on the amount above £50,000 up to £150,000. If you live in Scotland you will have to pay the higher rate of 41% tax on the amount above £43,431 up to £150,000.
Additional rate
If you live in England, Wales or Northern Ireland and have taxable income of more than £150,000, you will have to pay the additional rate of 45% tax on the amount above this level. If you live in Scotland, you’ll have to pay a top rate of 46%.
Duncan Greenland – see link for explanation https://fullfact.org/economy/scotland-england-public-services-spending/
On Scottish independence,
The Scottish referendum of 2014 suggests remaining within the UK is the preferred option. The SNP argue that the UK’s withdrawal from the EU effectively nullifies the 2014 decision. However, the Tories enjoyed a resurgence in 2017 in Scotland after the EU referendum. and opinion polls suggest that voters are split down the middle on independence.
Given this background, the policy of home rule adopted by Scottish Liberal Democrats appears a reasonable. The practical implementation could be along the lines of devo-max (full fiscal autonomy).
Instead of receiving a block grant from the UK Exchequer as at present, the Scottish Parliament would receive all taxation levied in Scotland; it would be responsible for most spending in Scotland but make payments to the UK government to cover Scotland’s share of the cost of providing certain UK-wide services, including at least defence and the conduct of foreign relations.
A 2015 IFS report in calculated that there would be a gap of £7.6 billion in Scotland’s budget under FFA, in comparison with the current system for distributing spending.
The SNP argued that it overlooks the extra growth the SNP says it can generate with more powers. In a later report the IFS said:
“…given current spending and revenue forecasts, the gap would likely grow rather than shrink over the next few years. It would remain the case that full fiscal responsibility would likely entail substantial spending cuts or tax rises in Scotland. While a big and sustained rebound in oil revenues or significantly higher growth in Scotland could mitigate this, there can be no presumption that either would occur.”
“There are a number of aspects of fiscal autonomy which are unclear; the level of payments to the UK government (for debt interest and Trident renewal), the ability of the oil sector to redeploy into other areas filling the productivity gap, and whether economic growth in Scotland is better supported by an Edinburgh or London government.”
Ultimately, I think there would be some early transitional pain for Scotland, but full fiscal autonomy is worth pursuing in its own right and ultimately the decisions on the future path of Scotland’s economy should be taken in Edinburgh not London.
David McKenzie – this is an excellent article, exactly the kind of clear thinking we need ahead of next year. You are very welcome in our party.
The danger for any democracy is when voting happens mainly along either ethnic or national lines. It clearly doesn’t work very well in Northern Ireland. No matter how bad any government might be, one section of the population will always vote for Irish Nationalist parties and the other will vote for Unionist parties.
The same problem is starting to develop in the UK. The Tories are becoming an English Nationalist Party, and we already have the SNP taking nearly all the seats in Scotland. Mainland parties take the sensible decision to largely keep out Northern Irish politics. If the EU were to extend its democracy I can’t see it would be any different there either. Politics would be a simply everyone voting for parties to represent their own National Interest. So rejoining the EU isn’t going to fix anything.
I can’t see this changing any time soon and that does mean the chances of either Labour or LibDems, especially as both aren’t interested in any alliance, forming a government don’t look too good for the foreseeable future. Labour needs to do well again in Scotland and there is little sign of any revival.
@Duncan Greenhall,
“am puzzled as to where the tax revenue comes from that enables Scotland`s ” ability to spend roughly……”
The same place as all money comes from. It’s just an IOU of government. In any currency union whether it be the USA, Canada, or Australia money will naturally gravitate to the more prosperous areas. The task of any government is to try to equalise the economy throughout the currency region by using its fiscal abilities. So, for example, in Australia, Tasmania will be a net recipient of Federal funds. In the USA it will be the poorer states like Tennessee and Louisiana. New York State will be a net contributor. Arguably the US, Australian and UK governments should all do more than they actually do. They could spend more in the less affluent areas without it causing inflation whereas spending in the more affluent areas definitely does.
Maybe not in the price of bread. That can be shipped around to equalise prices. But we certainly see high inflation in the property market.
The same thing happens in the eurozone. Euros gravitate to the richer areas like Germany and the Netherlands but the EU doesn’t have a government to apply the necessary level of fiscal equalisation. So it’s hardly surprising they have the problems they do.
We are never going to overcome the snp argument with an economic argument. That only appeals to the reasonable. We need to also appeal to the animal spirits. This is also true at the UK level.
@ Doug Chisholm, “That only appeals to the reasonable.” The implication of that being what, Doug ?
Are you saying that those Liberal M.P.’s – back in the days when Scotland had 58 Liberal M.P.’s and a Liberal Government in Westminster – and who campaigned for Scottish Home Rule…. were being unreasonable ?
Are the Scottish Green Party representative of what a more radical Scottish Liberal Party ought to be like ? And, would it be unreasonable to suggest that David McKenzie has jumped from a sinking Titanic into a canvas canoe without a paddle in an icy sea ?
Answers would be welcome and very interesting.
Scotland needs to be able to run its own economic affairs from Edinburgh without reliance on the Westminster parliament. At the current low rates of interest, there is no need for undue concern over the cost of servicing Scotland’s share of the UK debt under devo-max or of being able to grow the economy sufficiently in the future to lessen the burden of debt as a % of GDP. It will also put an end to the SNP putting all the failings of the Holyrood parliament at the feet of the Westminster parliament.
Commenting on the news that UK public debt has gone over 100% of GDP, Ed Davey said:
“This level of public debt hasn’t been seen in generations, but nor have we experienced such a devastating pandemic that has demanded such necessary spending.
“Many families will rightly worry about what comes next. The Conservatives must not slash and burn our public services in response – that would harm our society and harm prospects of growing our economy out of this debt.
“The best response to this debt is a massive green recovery plan so we can provide the green jobs and the green growth to pay off the debt, get people into employment and tackle the climate emergency at the same time.”
There are three elements that should be considered both in Scotland and UK wide:
1. Government borrowing and spending in the recession to offset the decline in private sector spending – supporting both consumer spending and business investment.
2. Investment (fiscal stimulus) to support economic recovery and job creation.
3. As the economy recovers, higher levels of taxation to support higher levels and quality of public services.
Scotland already has a degree of discretion on its levels of taxation, but should have full autonomy. The country will want to be able to independently manage its tax and spending policies to be able to make the necessary investments to substitute for declining revenues from North sea oil and provide the quality of public services that the Scottish public expects.
“Scotland needs to be able to run its own economic affairs from Edinburgh without reliance on the Westminster parliament”
The only way it can do that is to have full independence, and with its own currency
“At the current low rates of interest, there is no need for undue concern over the cost of servicing Scotland’s share of the UK debt under devo-max”
It really all depends on what we agree is “Scotland’s share”. If Scotland is not a currency issuer then it really will have borrow the money. It won’t be able to create it at 0% interest. That’s what the BoE has done which is why interest rates are so low. Lenders will know that and will know it’s much riskier lending to Scotland than it is to the UK govt in Westminster. They’ll be like Italy. They’ll have to pay a premium. The phrase “current low rates of interest” will not apply.
Look, the Scots can’t have it both ways. They are either in or they are out. It’s their call.
“The best response to this debt is a massive green recovery plan so we can provide the green jobs and the green growth to pay off the debt….”
Ed Davey should know that Govt doesn’t “pay off” debt. Government is not a household. They pay off debts. Govts create money to repossess their own debt! Before the lockdown started the Govt debt to gdp ration was about 80% and a quarter of that was owned by Govt. So how does that work? If I lend myself some money and I end up owning my own debt am I in a better or worse position?
Govt has just lent itself, via the BoE, another £200 billion. Apparently the banks need more liquidity so they can lend out more. But, JoeB always tells us that banks create money as they lend. Which they do. So why do they need more liquidity (ie money) from the BoE?
Yes we should have a “Green recovery plan” and “green jobs” and all the rest of it. Will the National Debt fall? Maybe. Maybe not. It will really depend on what we all, ie everyone else apart from Govt, want to do after the recovery. If we all want to save big time the debt will rise. It has to. Our saving is just the mirror image of the Govt’s borrowing.
Peter Martin,
these were the arrangements put in place after Irish Independence https://www.businessinsider.com/the-currency-model-used-after-irish-independence-could-work-for-scotland-too-2014-8?r=US&IR=T
“n 1926 the government of the new Irish Free State established its own separate currency, the Irish pound, which was anchored to sterling. Apart from a fairly small portion of currency issued on trust, every pound in circulation was backed ultimately by a deposit in the Bank of England of sterling banknotes or of British government bonds (which were the basis on which Bank of England notes themselves were issued).
This was neither monetary union nor complete monetary independence, but it was an arrangement that both sides agreed best served their interests: Ireland got a strong and stable currency; the UK suffered no loss to the international reach and prestige of sterling, and both sides avoided an increase in the cost of doing business with an important trading partner (something like 98% of Irish exports went to Great Britain or Northern Ireland – far higher than the circa 60% of current Scottish exports that go there).
This arrangement lasted until Ireland chose to join the European monetary system in 1978. In the meantime it gave the Irish government the freedom to make its own choices. At each of sterling’s numerous shocks, including going off the gold standard in 1931, devaluation in 1949 and 1967, and the IMF crisis in 1976, the Irish government decided, on balance, that Ireland’s interests would be served best by maintaining the sterling link. The British government also preferred to preserve it, even after Ireland became a republic in 1949.”
It’s quite comical, but in line with his usual logicality, that Peter Martin is all for ‘Great Britain’ to rule itself outwith the EU, but when it comes to Scotland wanting to rule itself outwith the UK it comes in for withering scorn. Thanks a lot, Pete..
Peter Martin,
“why do they [banks] need more liquidity (ie money) from the BoE?”
Its called maturity transformation. The banks finance long-term assets e.g. mortgage loans with short-term finance i.e deposits from savers and money market loans. Like a game of musical chairs, some institutions (particularly those reliant on International money markets) are going to lose out when the music stops. The solution is to bring another chair (QE) and restart the music to keep the financial system running.
When private sector savings start to decline the money markets may suddenly dry up as lenders stop providing short-term loans to each other. Northern Rock demonstrated what can go wrong here just before it was bailed out by the government. This is why the central bank, in its role as lender of last resort during periods of financial stress, steps in to provide liquidity to the financial markets and maintain banks confidence that they have access to sufficient funds to continue making new loans.
@ JoeB,
Yes, as has been pointed out, Scotland can use whatever currency it likes or peg its own currency to another currency but it’s not a good idea. The hopes of the Irish people for independence weren’t met by maintaining a subservience to the UK. For many years Ireland’s best export was its young people. The economic history of Ireland from 1920 to 1978 is a lesson in what not to do. They’d have been better staying in the UK and fighting for a better deal.
Ireland finally got it right with the introduction of the Irish pound or punt. But then it got it wrong again when it switched to the euro.
@ David Raw,
There’s no inconsistency. If the Scots want their own independence they should go for it. 100%. No half measures. If Iceland with a population of some 300,000 can organise its own currency then there’s no reason why an independent Scotland can’t do the same. The PTB in the EU know the significance of an independent country issuing its own currency. That’s why they wanted to take it away and impose the euro.
As Prof Keating of the SNP puts it:
“What is the point in getting out of the UK if you’re going to give your sovereignty over to Brussels instead?”
https://www.bbc.co.uk/news/uk-politics-37107148
@ Joe B,
You’ve been keen to inform us all recently how banks create money when they lend. You tell us that the popular perception, is according to the BoE, incorrect. Banks don’t act as intermediaries. The don’t take in money from savers and lend it out to borrowers.
But now you’re saying that:
” The banks finance long-term assets e.g. mortgage loans with short-term finance i.e deposits from savers and money market loans.”
Do you want to have another think about this?
Peter Martin.
In the modern economy, deposits are created when banks extend credit (i.e., create new loans). Private banks are creators of money and then look for the necessary funding and reserves of central bank money to finance withdrawal of deposits overnight or later. Banks will only extend loans if they are confident of securing low-cost funding.
Bank lending is not restricted by reserve requirements, it is limited by profitability considerations; that is, given a certain demand for loans, banks base their lending decisions on their perception of the risk-return trade-offs, not reserve requirements.
In a context whereby deposit accounts are insured by the government, banks may find it tempting to take undue risks in their lending operations. Since the government insures deposit accounts, it is in the government’s best interest to put a damper on excessive risk-taking by banks. For this reason, regulatory capital requirements have been implemented to ensure that banks maintain a certain ratio of capital to existing assets.
If bank lending is constrained by anything at all, it is capital requirements, not reserve requirements. However, since capital requirements are specified as a ratio whose denominator consists of risk-weighted assets (RWAs), they are dependent on how risk is measured, which in turn is dependent on the subjective human judgment. Subjective judgment combined with ever-increasing profit-hungriness may lead some banks to underestimate the riskiness of their assets. Thus, even with regulatory capital requirements, there remains a significant amount of flexibility in the constraint imposed on banks’ ability to lend.
Expectations of profitability, then, remain one of the leading constraints on banks’ willingness, to lend. And it is for this reason that although banks don’t need your money, they do want your money. As noted above, banks lend first and look for reserves later, but they do look for the reserves.
Attracting new customers is one way, if not the cheapest way, to secure those reserves. Banks don’t need your money; it’s just cheaper for them to borrow from depositors than it is to borrow from other banks.
Peter Martin,
Money and trust are closely related. In 1970, banks in the Republic of Ireland were closed for over six months by industrial action. Because everyone in Irish towns and villages used the pub/grocery stores, and the owner knew them, they agreed to accept deferred payments in the form of cheques that would not be cleared by a bank in the near future. Soon they swapped one person’s deferred payment with another thus becoming the financial intermediary. Cheques were endorsed and passed on from one person to another exactly as if they were money.
The Irish bank closures are a vivid illustration of the definition of money: it is anything accepted in payment. At that time, notes and coins made up about one-third of the money in the Irish economy, with the remaining two-thirds in bank deposits. The majority of transactions used cheques, but paying by cheque requires banks to ensure that people have the funds to back up their paper payments.
Today, a debit card works by instantly verifying the balance of your bank account and debiting from it. If you get a loan to buy a car, the bank credits your current account and you then write a cheque, use a credit or debit card, or initiate a bank transfer to the car dealer to buy the car. This is money in a modern economy.
So what happens when the banks close their doors and everyone knows that cheques will not bounce, even if the cheque writer has no money? Will anyone accept your cheques? Why not just write a cheque to buy the car when there is not enough money in your current account or in your approved overdraft? If you start thinking like this, you would not trust someone offering you a cheque in exchange for goods or services. You would insist on being paid in cash. But there is not enough cash in circulation to finance all of the transactions that people need to make. Everyone would have to cut back, and the economy would suffer.
Ireland avoided this fate because cheques were accepted in payment as money, because of the trust generated by the pub owners. Publicans were prepared to accept cheques, which could not be cleared in the banking system, as payment from those judged to be trustworthy. During the six-month period that the banks were closed, about £5 billion of cheques were written by individuals and businesses, but not processed by banks. It helped that Ireland had one pub for every 190 adults at the time. With the assistance of pub and shop owners who knew their customers, cheques could circulate as money. With money in bank accounts inaccessible, the citizens of Ireland created the amount of new money needed to keep the economy growing during the bank closure.
@ Joe,
You put it that “Money and trust are closely related.” I’ve previously said “anyone can create money the problem is getting it accepted” So that’s effectively pretty close to the same thing , right? And in this case the pub owners filled the void because the money created was generally accepted. Up to a point.
And this is what the banks do when they create money when they issue loans. This does need to be explained. If you think everyone ‘gets it’ you might want to take a look at a group called ‘Positive Money’ who clearly don’t get it.
So you do now seem to be saying close to the same as I’ve said but you’ve had to be pushed. I still don’t see why you have a problem with the Pyramid though. You might think an Irish pub owner for was good for a few hundred euros or so but if you were selling a house or an expensive car you’d want something higher up the Pyramid, right? Or maybe you’re a lot more trusting than I am!
The last round of QE worked reasonably well because the BoE was removing relatively high yielding bonds and replacing them with zero yielding cash. So interest rates fell sharply. This time there’s hardly any difference in the relative yields. So this round of QE won’t lower interest rates much at all. Neither will it encourage banks to lend.
As you say “If bank lending is constrained by anything at all, it is capital requirements, not reserve requirements.” The only constraint, nearly always, is the creditworthiness of the customer. Anyone with a house to use as collateral can always get a reasonably priced loan. I’ve only ever done this a couple of times and it’s just not been a problem for the bank. They’d have willingly lent a lot more than I asked for.
But for a young person in rented accommodation it’s a different story. No amount of QE will encourage banks to lend if the risk is perceived to be too high. No amount of QE will encourage those with good credit ratings to borrow more than they are doing already.
It doesn’t matter if this QE is £200 billion or £500 billion. It’s not going work this time around.
Peter Martin,
the author of this article concludes his piece thus “The Scottish Liberal Democrats will use appropriate powers where necessary to tackle problems in Scottish society and push for further devolution, while maintaining our ties to the worlds 6th largest Economy,”
Further devolution in this context means greater fiscal autonomy. As we have discussed, and the example of Ireland in 1970 shows, money creation is not dependent on government but rather on functioning and trusted intermediaries that can take on that role. The citizens of Ireland created the amount of new money needed to keep the economy growing during the bank closure. Irish publicans would perhaps not recognize that they were creating money, and they would not know that in doing so they were providing a service essential to the functioning of the economy, but that is what they were doing in extending credit.
After the Irish Free state was created in 1922 sterling continued to be used. Bank of England notes continued to circulate and the Irish banks issued notes of their own backed by deposits with the BofE. The Irish pound was introduced in 1926 at 1:1 parity with Sterling. Ireland did not establish a central bank until 1943 i.e. there was no lender of last resort for the first 21 years of the state which included the period of the great depression and the early years of WW2.
A Scotland with full fiscal autonomy could continue using sterling. If Scotland issued its own bonds independent of any UK wide guarantee these (like municipal bonds) might require an interest rate higher than the rest of the UK at first, until the market was satisfied, as a result of experience, that they were equally safe and backed by a lender of last resort. To establish that record would be a matter of how Scottish governments conducted their fiscal policy. However, once established a prudent Scottish government may find itself in an easier position to attract capital than many other larger economies that have notional control over their own currencies.
Peter Martin,
on the issue of QE, I would agree it is not likely to have a significant impact in stumulating spending in the economy. I expect we will see cuts in VAT and payroll taxes as stimulus measures. While QE may keep interest rates very low it inflates or cushions falls in both shares and property prices.
Nationwide has just announced it will require a 15% deposit on new mortgages https://www.theguardian.com/business/2020/jun/17/nationwide-triples-minimum-deposit-for-uk-first-time-buyers in expectation of falling house prices and negative equity. This is likely to counter any impact of QE in the residential property market.
There is a channel that QE can be deployed in to make asset swaps that can potentially provide a significant boost to the real economy.
Alter is a member of the Coalition for Economic Justice The CEJ is developing a proposal for a scheme of rent support that will be published shortly:
Broadly, the Bank of England under its quantitative easing program would offer to buy land from landlords, leaving them with a long lease to operate in return for an annual payment on the rental value of the land. The Bank would offer a year’s holiday on the payment of the annual rent, as long as the erstwhile landowner passed on this rent holiday to their tenants. Owner-occupiers could be given the same opportunity to sell their land to the Bank and receive an interest-free injection of capital into their business. The scheme could provide a cash injection to landlords and owner-occupiers to sustain their businesses. Tenants would enjoy a twelve-month rent reduction and a new source of public revenue would be created.
@ Joe Bourke “the author of this article concludes his piece thus “The Scottish Liberal Democrats will use appropriate powers”.
I don’t know on what authority he makes that statement. He only joined last year and he’s hardly hung his coat up.
@ Joe B,
Yes of course Scotland could copy what Ireland did. But the Scots might want to take a look at the economic history of Ireland. They could start by reading this article by Enda Delaney in the Irish Times.
To some extent all European countries have used emigration as a safety valve to cover their own economic incompetance. The Irish have taken the biscuit though!
“In the twentieth century mass emigration reached levels during the 1940s and 1950s that were reminiscent of the 1850s, in the aftermath of the Great Irish Famine. Again the 1980s were another “lost” decade characterised by emigration and unemployment.”
The article doesn’t mention the 30s but probably then there would have been less point leaving because every other country was in bad shape too.
https://www.irishtimes.com/blogs/generationemigration/2011/11/02/traditions-of-emigration-the-irish-habit-of-going-away/
“A Scotland with full fiscal autonomy could continue using sterling”
No it couldn’t. They’d be in the same position as Ireland and unable to use the fiscal power of a currency issuing country to build their own economy. They’d be trapped in perpetual austerity. They’d be unable to change that. There would be a mass exodus from Scotland in the same way as there was in Ireland. Why make the same mistake?
The pound is an IOU of the Westminster government. Only the Westminster government can use the £ sterling and have full fiscal autonomy. We don’t want to use the euro. We want to be able to write out our own IOUs. We want full fiscal autonomy too. That is the natural thing for any independent country.
The history of Ireland would have been quite different had they done that too.
@ JoeB,
I agree that QE is essentially an asset swap. But, so is nationalisation. There may be a case for the BoE to own government bonds but the ‘B’ in ‘BoE’ means ‘Bank’. It shouldn’t be in the real estate business! If the Government wants to nationalise land, either voluntarily or compulsorily, and lease it back to the owners then that is what it should do.
The CEJ plan is the same thing. A voluntary nationalisation scheme using the cover of the BoE to avoid it being called that. The thinking seems to be that should Govt create lots of ££ (the BoE is effectively a part of Govt) then buy up assets and hope that the recipients of those ££ do something useful with them.
I have a better and far simpler idea. The Government should do something useful with the money themselves.
As a British Citizen who enjoys dual nationality as a New Zealander I feel that the decision is entirely a Scottish one. Self determination is a basic right & while “stronger together” may be true anybody who thinks this is entirely an economic decision is fooling themselves. The paternalistic attitude of successive Westminster governments is possibly the greatest incentive for independence. I do not pretend to know the details of economic policy but I think that if I were a Scot I would might well think the risks well taking. The way the disUK is behaving at present it will not be the world’s 6th largest economy much longer.
Peter Martin,
I have never heard of voluntary nationalisation, it is always compulsory. The CEJ proposal is effectively a sale and leaseback financing operation in a financially distressed commercial property market i.e. a means of providing capital not currently available in private financial markets. This is what the joint HM Treasury and Bank of England lending facility, named the Covid Corporate Financing Facility (CCFF) is also about. The facility is designed to support liquidity among larger firms, helping them to bridge coronavirus disruption to their cash flows through the purchase of short-term debt in the form of commercial paper.
Public money creation can only be effectively used to counter deflation in markets where there is excess capacity as is currently the case with the commercial property market. If it is used as QE has been it will inflate asset prices in residential property as well as share prices.
Direct government spending on goods and services or the creation of new assets in the real economy is a matter of fiscal policy. When there is a deficiency of spending and excess savings in the economy, such government spending and borrowing can offset the effects of both.
@ JoeB,
I’m not necessarily against any voluntary transfer of land ownership, whether or not you want to call it nationalisation, but some questions:
1) Why does it matter that the BoE should own the assets rather than the Treasury?
2) Shouldn’t this be a democratically elected govt decision rather than one for an independent BoE?
3) Why not reflate the economy by targetted Govt spending instead? We might prefer new money to be spent on new schools rather than new Lamborghinis. We all agree that Govt spending can increase inflation. So why not just increase spending until any inflation target is met?
Just to try to keep this on-topic I should add that an independent Scotland could implement a similar CEJ land ownership transfer scheme only if it had its own currency. It couldn’t do it and carry on using the pound. Full fiscal autonomy means the ability of government to conduct QE and similar measures. Whether or not that’s a good idea would be for the Scottish people to decide.
Peter Martin,
QE is operated through the Bank of England Asset Purchase Facility Fund Limited. (BEAPFF) is a wholly-owned subsidiary of the Bank and is the legal counterpart to market transactions. The Bank acts as agent for BEAPFF. The level of the fund and type of assets that can be purchased are authorised by the Government. This letter from the Chancellor to the BofE governor sets out the terms https://webarchive.nationalarchives.gov.uk/+/http:/www.hm-treasury.gov.uk/d/ck_letter_boe290109.pdf The securities that the fund can purchase includes asset-backed securities.
QE is a temporary measure (that can be reversed). As such it is perhaps appropriate for use as a means of facilitating asset swaps and as a tool that can assist in meeting inflation or nominal gdp growth targets. If QE is reversed at some point for land purchases the financing is simply replaced with bonds issues to the private sector.
Government spending into the economy requires permanent funding. While the government may make use of its ways and means overdraft facility with the Bank of England, as necessary, it will secure longer-tern loan financing for infrastructure investments and tax collections for the financing of ongoing spending on consumption.
An independent Scotland that continues to use sterling would issue bonds to acquire rent yielding commercial land. The QE element would only be utilised where the BofE was conducting such operations and purchased Scottish asset-backed bonds as part of its asset purchase facility.
A country can control either its interest rate or the value of its currency, but not both. If Scotland uses a Scottish pound pegged to sterling – it will adopt the monetary policy (interest rate) of the UK and will therefore use exchange rate management (buying and selling of sterling with Scottish pounds) to maintain parity with the British pound in much the same way as Denmark maintains the exchange rate of the Krone with the Euro.
@ Joe B,
Nationalisations are also ” a temporary measure (that can be reversed).” The Tories, with some help from the Lib Dems, have been doing a lot of ‘reversing’ in recent decades. I don’t expect you’ve made the same argument in defence of re-nationalising the railways.
“Government spending into the economy requires permanent funding”
No it doesn’t. A government can, for example, put a heap of money into developing a fighter plane or a smaller amount into a tilt-train, and then pull the plug completely if it isn’t happy.
“An independent Scotland that continues to use sterling would issue bonds to acquire rent yielding commercial land. ”
If that is such a good idea, why don’t Lib Dem councils do the same thing? Would it be that expenditure on the interest on the bonds would be higher than the rent that is yielded from the land? Insofar as it might just be a possibility to consider, it can only make any sense if the BoE creates the money interest free. A form of QE if you like. Scotland could only engage in QE if it had its own currency.
PS Just a reminder that I asked 3 questions previously and you haven’t answered any of them.
Peter Martin,
1) Why does it matter that the BoE should own the assets rather than the Treasury? Both the BofE and Treasury are arms of government. The BofE was nationalised in 1946. As noted above, a separate legal entity, the Bank of England Asset Purchase Facility Fund Limited, was established to manage QE operations in accordance with the mandate given to by government.
2) Shouldn’t this be a democratically elected govt decision rather than one for an independent BoE? See 1 above. Each round of QE is authorised by the government. The BofE has operational independence not cartle blanche autonomy. The reason is financial stability and confidence in the financial marlets. As to why this is important see Andrew Bailey’s comments on the difficulties the government experienced in selling debt at the start of the coronavirus crisis https://news.sky.com/story/coronavirus-governor-says-bank-of-england-saved-britain-from-effective-insolvency-12012369
3) Why not reflate the economy by targetted Govt spending instead? We might prefer new money to be spent on new schools rather than new Lamborghinis. We all agree that Govt spending can increase inflation. So why not just increase spending until any inflation target is met?
The government budget already operates on the basis of deficit funding. QE is designed to counter debt delation and stimulate private sector borrowing and investment. Government spending needs to be sustainable not subject to cuts to contain inflation or taxes raised to reduce disposable incomes – that is a stop/go policy.
Fiscal management requires setting out the resources needed for provision of good quality public services and setting tax and borrowing policy around planned current and investment spending. Outside of periods of economic shocks automatic stabilisers will smooth the troughs of peaks of the economic cycle. During recessions standard Keynesian monetary and fiscal stimulus is required and is withdrawn when pump-priming is no longer required and ‘animal spirits’ take over. To continue stimulus when the economy close to capacity just creates stagflation.
@ Joe B,
Thank you for your replies. In response:
1) The CEJ proposal isn’t QE. Buying up land isn’t the same as buying up bonds. I can’t see that Lib Dems will generally be in favour of it in any case. However you want to dress it up it’s putting public money into the hands of the wealthy. So those who need it the least will get the most. Those who need it the most, ie the landless poor, will get zilch.
2) Yes I agree with this. I’d probably go further. The BoE isn’t really independent at all. It’s all a PR exercise.
3) Controlling the economy by fiscal measures is no more stop-go than by monetary measures. We are hearing that VAT might be reduced to stimulate the economy. Yes, it might be inconvenient for business owners to modify a value in their software but providing its done at the end of a business quarter it should be manageable. There’s other taxes and spending levels to be adjusted too. Spending on capital projects can be brought forward or delayed. So I’m not advocating constantly changing rates of VAT or income tax.
As interest rates can’t go any lower there’s no alternative method of regulation in any case. Whatever its drawbacks it has to be a better option than putting money into the pockets of wealthy landowners and hope they spend it on the right things.
The CEJ proposal is an asset swap. It does not increase (or reduce) the existing wealth of landowners. It does two things that central bank support to the economy is intended to do. It provides liquidity, so commercial landowners can meet loan payments to banks and it provides a one year rent holiday to tenants on the high street that allows them to stay in business during this pandemic.
Stop/go policies are disruptive and damaging whatever the policy instrument used to reflate an economy that does not have the infrastructure, productivity and International competitiveness to generate growth.
Public spending has been massively increased but it is unsustainable over the longer term. Some of the increased spendings will not and should not be reversed e.g. the £1k increase in the Universal credit basic allowance or the increase in housing benefit levels.
Infrastructure spending takes time to roll out and is not easy to accelerate. What can be done is pothole funds and 100% retention of business rates by all local councils in addition to the support payments for business rate holidays to the hospitality, tourism and leisure sector. A job guarantee scheme along the lines of the future jobs fund will also be needed. It would be a mistake to cut tax rates. That will undermine public service provision in the long-term. Tax yields will fall automatically as a consequence of trading losses incurred and deferred tax payments.
Interest rates can go lower – they can be negative as they are in Japan, Switzerland and the 19 countries of the Eurozone.
@ Joe B,
Negative interest rates are a sign that something is seriously wrong in the economy or seriously wrong with the thinking of economists who push the concept. Probably both. In any case, seriously negative rates would mean getting rid of cash. There is really no need for them. We’ve managed this long without them, so why now? If inflation is 2% and interest rates are close to zero then there really is no need for them to be any lower.
If commercial landowners need liquidity they can sell some land on the open market. There is no need for the State to become involved. The entry of a large buyer into the market will push up prices and further distort an already distorted market. The end result will be the BoE is paying an ever inflated price for an already overvalued asset.
Have you canvassed opinion on the idea of giving relief to tenants by buying up land from landowners? Most people just won’t see the logic. And maybe that’s because there isn’t any! If you want to put money into the hands of tenants on the high street then just do it. Why not?
Don’t channel it via the pockets of wealthy land and property owners.
Peter Martin,
zero interest rates are a sign that something is seriously wrong in the economy or seriously wrong with the thinking of economists who push the concept. If money is to be a store of value, pension funds and savers generally must be able to earn a return in excess of the rate of inflation.
As mentioned above, The CEJ proposal is effectively a sale and leaseback financing operation in a financially distressed commercial property market i.e. a means of providing capital not currently available in private financial markets. This is what the joint HM Treasury and Bank of England lending facility, named the Covid Corporate Financing Facility (CCFF) is also about. The CCFF is intended to provide liquidity funding to larger non-financial companies that make a material contribution to the UK economy and were viable prior to the impact of COVID-19 (the Coronavirus Business Interruption Loan Scheme is aimed at supporting smaller businesses).
The CEJ program for commercial land is an extension of the liquidity program that couples a 1-year rent holiday for tenants with the program. Tenants benefit from a twelve-month rent reduction and a new source of public revenue would be created.
This is targeted monetary and fiscal policy in a distressed sector where multiple bankruptcies are expected in the absence of support measures http://news.bbc.co.uk/1/hi/business/8504770.stm Negative equity was widespread in the commercial property sector before the impact of Covid-19. Now, with many tenants unable to pay rents businesses will close and unemployment will escalate. Landlords will default on loans and bank finances will become stressed as they did during the financial crisis. When that happens the debt becomes sovereign debt just as it did in 2008. This is why intelligent people seek to prevent systemic disruption in financial and property markets, wherever possible.