Ben Wray: Scotland's economy won't unlock its potential until we move past groundhog day debates

CommonSpace columnist and Common Weal head of policy Ben Wray welcomes cross party support for a Scottish national investment bank and says it's time roll our sleeves up

IT sometimes feels like groundhog day debating the Scottish economy. 

The battle is intense but no one ever seems to win. A couple of months of being distracted by other things goes by; then the same battle lines are drawn up all over again. In each turn of the wheel more heat is generated but even less light.

There are obvious reasons for this dull, repetitive cycle. Economic debate is pinned around a small set of periodically updated statistics that do not actually tell us much about the structure and form of the economy. 

The Scottish media and political commentry circuit contains little dynamism on economics, and thus rarely probe further or ask deeper questions of our politicians.

The nature of devolved power within a unitary state is such that whenever these statistics go up or down, each side blames/gloats as appropriate. The Scottish media and political commentry circuit contains little dynamism on economics, and thus rarely probe further or ask deeper questions of our politicians.

So, in this column, let’s just start by trying to clear the ground before proceeding, with the hope that we might then be able to move forward onto more interesting terrain.

The UK state is primarily responsible for the economic management of the Scottish economy. The government which controls the key monetary and fiscal levers in the economy has the main mechanisms for managing the national economy.

Beyond this, the UK Government controls secondary levers which are vital to economic management, including company law, financial services, the energy grid, rail infrastructure, control of local authority borrowing limits, corporation tax, immigration, key aspects of social security, pensions and the minimum wage. 

The majority of government spending in Scotland still comes directly from the UK Government, out of total spending of over £750bn.

If comparisons are of any use, they should not be between Scotland and the rest of the UK – we should instead compare Scotland to all other regions of the UK economy.

The Scottish Government has a range of tools for intervention into this macro-economic framework set by the UK state. These tools can act to more or less improve Scotland’s economic position within the confines of UK state management. These tools could be classed as, at best, secondary levers, many of which are only under partial control. 

They include: local tax, aspects of income tax, a budget for spending on infrastructure of over £3bn per year (including very limited capital borrowing), debt-based construction spending on public projects worth a maximum of five per cent of future government annual revenue, the ability to set up a national company, aspects of energy policy, aspects of social security policy, road
infrastructure, aspects of procurement policy and aspects of housing policy. In total, Holyrood spends about £33bn into the Scottish economy.

If comparisons are of any use, they should not be between Scotland and the rest of the UK. As Robin McAlpine has pointed out: "Scotland isn't lagging behind the UK – the UK is lagging behind London and the south-east. Or more accurately, everywhere in the UK suffers from London and the surrounding economy monopolising the benefits of the UK economy – such as they are." 

We should, therefore, compare Scotland to all other regions of the UK economy. Even by standard measurements like GDP, Scotland is a better than average performer if you break the UK into regions. It performs even better if you (as we should) take population growth out of the calculation and look at GDP per capita.

Even GDP per capita is inherently flawed. It doesn’t tell you anything about what economic product is being made, how sustainable it is, what the distribution spread of it is, whether it has negative or positive externalities, and so on. 

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For instance, rising house value contributes to GDP as it is calculated as 'owner imputed rent'; an estimate of the amount the owner-occupier would be paying if they were renting. But the rising value of homes doesn’t actually produce anything, and contributes greatly to denying other people access to affordable housing.

Employment is also an increasingly deceptive measurement of economic progress, since social security policy is designed to encourage people to register as self-employed or in-work so that they can gain tax credits and other forms of welfare support that they would not get if registered as out of work. 

This does not mean people are working sufficiently to maintain a decent standard of living. The number of people working minimal hours has risen enormously, and so has in-work poverty.

Even by standard measurements like GDP, Scotland is a better than average performer if you break the UK into regions.

The absurdity of continuing to rely on GDP and employment as our standard bearer economic measurements is revealed in this Financial Times graph, showing just how out of kilter it is in the UK with actual living standards.

So, in clearing the ground of economic debate, we can summarise as follows:

- Be deeply suspicious of anyone who tells you that "Nicola Sturgeon is responsible for a good/bad" economic performance in Scotland. At the same time, reserve some suspicion for those who float the notion that Holyrood is entirely impotent on economic matters.

- Be deeply suspicious of anyone who compares Scotland’s economic performance like for like with the rest of UK as a whole without qualification.

- Be deeply suspicious of anyone who uses GDP and employment figures as if they are a definitive statement on economic performance.

With the ground cleared, we should be able to move forward. What could the Scottish Government do to improve the relative position of the Scottish economy versus other regions of the UK on creating sustainable, well-paid, productive work for everyone?

It performs even better if you (as we should) take population growth out of the calculation and look at GDP per capita.

Common Weal has been pleased to see one of our major policy pushes, for a Scottish National Investment Bank to provide billions in financing for well-paid, socially and environmentally useful work (for more on this click here), get a wider hearing over the past week. 

Scottish Labour published its industrial strategy for Scotland last week and it reiterated support for the idea which was in the Labour party’s General Election manifesto in May. 

It was then put to Keith Brown, Scottish Government economy minister, on Sunday Politics Scotland, who said "of course we would want to set up that type of initiative".

This is a significant development. The Scottish Government did not include the proposal for an investment bank in either its 2016 Scottish election manifesto or the 2017 General Election one.

Instead, it pushed its £500m, three-year Scottish Growth Scheme – which would provide guarantees to commercial banks to pursue loans worth a maximum of £5m to Scottish companies seeking to boost their exports – as an alternative policy approach.

Common Weal has been pleased to see one of our major policy pushes, for a Scottish National Investment Bank to provide billions in financing for well-paid, socially and environmentally useful work, get a wider hearing over the past week.

Nonetheless, the SNP conference in March backed the proposal for a Scottish national investment bank.

Brown confirmed on Sunday that the first minister’s council of economic advisers is now pursuing a £7bn plan through the Scottish Futures Trust "to do exactly that" with the Treasury - as permission is required to count the national investment bank’s assets and liabilities as off-balance sheet.

It is not clear to us why the Scottish Growth Scheme, which also required permission from the Treasury for special accountancy treatment, was announced by the first minister and then the request made to the UK Government, whereas a national investment bank requires permission first before being pursued. 

It seems boldness is only appropriate when a scheme is proposed that is in the interests of commercial banks. Nonetheless, we can count it as genuine progress that now the Greens, Scottish Labour and the SNP have stated their support for a national investment bank.

Now we need to win the argument about exactly what sort of economy the bank is going to help build. Is it going to fund businesses that can easily shift their assets abroad when they are big enough or will it provide incentives for community and co-operative owned companies that are asset-locked and thus will continue to operate on behalf of their employees and the community? 

Now we need to win the argument about exactly what sort of economy the bank is going to help build.

Is it going to limit itself to funding the private sector or will it support local authorities to set up local energy and housing companies for direct public investment? 

Is it going to make investment decisions solely on the bottom line or prioritise investments that are socially and environmentally useful? Will it shy away from sectors of the economy where the market is dominated by a few players or will it prioritise strategic investment in businesses that can reduce our reliance on global corporations in sectors like energy, clothing and food?

It is about time we started debating these questions, and got past the narrow and fruitless debate that sadly still dominates discussion of the Scottish economy today.

Picture courtesy of michaelgoodin

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Comments

MauriceBishop

Wed, 07/12/2017 - 13:18

Ah, the "levers" argument. Here is what Nobel-pricze winning economist Paul Krugman calls the "dirty little secret of economics":

we don’t know very much about how to raise the long-run rate of economic growth. Economists do know how to promote recovery from temporary slumps, even if politicians usually refuse to take their advice. But once the economy is near full employment, further growth depends on raising output per worker. And while there are things that might help make that happen, the truth is that nobody knows how to conjure up rapid productivity gains.
http://www.nytimes.com/2015/06/19/opinion/voodoo-jeb-style.html?rref=col...

But separatists like the levers argument because it allows them to aver that Scotland's economy will grow more quickly if they are put in charge, which is meant to explain how indy Scotland will deal with the huge structural deficit.

geacher

Wed, 07/12/2017 - 17:43

It didn't take me long to get bored with this..... When you get a basic error early in the article ("The majority of government spending in Scotland still comes directly from the UK Government,") then it tends to undermine one's trust in what is to come... oh wait here is the obligatory "levers" statement...goodness me, that didn't take long... now what's this "everywhere in the UK suffers from London and the surrounding economy monopolising the benefits of the UK economy " oh what a bummer...the rest of the UK "suffers" because London contributes more than 22% of the UK's GDP and almost 25% of its tax revenue? Having a successful capital city is a bad thing???? Do us a favour, we -yes ALL of the rest of the UK should be grateful to London and the South East. What's next "Even GDP per capita is inherently flawed"....aye so it is. I gave up reading this nonsense when I got to the "deeply suspicious" bit I gave up. Don't believe the truth?

peterabell

Wed, 07/12/2017 - 19:35

The below-the-line comments on this article from some of British nationalism's more tedious amateur propagandists nicely underlines the point that economic discussion desperately needs to move away from the threadbare "Too wee! Too poor! Too stupid!" arguments that are the stock-in-trade of ideological unionists. But Ben Wray will have to forgive me if I am naturally wary (if not deeply suspicious) of proposals which so much as give the impression of being advanced as an alternative to independence.

Or, to put it another way, I need to be reassured about whether and how such economic proposals fit with the overarching constitutional case for restoring Scotland's independence.

Economic arguments have their place. But they can never supersede or substitute for arguments deriving from the fundamental principles of democracy and justice.

It makes perfect sense that we should, for the present, seek to make the best of our situation within the UK. But let us be perfectly clear that there is no economic arrangement, however comfortable, which negates or diminishes the case for rectifying the gross democratic anomalies of the existing political union by restoring Scotland's rightful constitutional status.

Let it also be clearly understood that this is NOT an argument for independence at any cost. It is perfectly reasonable to assume that a nation which can make the best of a grotesquely asymmetric political union will be even better able to effect improvement when freed from the constraints and impediments of a devolved settlement purposefully designed to severely limit the scope of Scotland's democratically elected parliament.

MauriceBishop

Wed, 07/12/2017 - 21:04

"Too wee! Too poor! Too stupid!" is indeed threadbare, because the separatists - who are the only ones who ever say it, or say anything like it - have worn it out as their all purpose deflection mechanism whenever they encounter information from outside their bubble.

"It is perfectly reasonable to assume that a nation which can make the best of a grotesquely asymmetric political union will be even better able to effect improvement when freed from the constraints and impediments of a devolved settlement purposefully designed to severely limit the scope of Scotland's democratically elected parliament."

That's great. Now then: indy Scotland will have to have a currency. Can you explain either of these two things:
1) How indy Scotland will amass 50 billion to back its currency, which is what the model of Denmark suggests is the minimum acceptable amount?
2) If you can't do (1), what country other than Denmark is a better model, and why?

Peter Dow

Wed, 07/12/2017 - 20:30

"The UK state is primarily responsible for the economic management of the Scottish economy. The government which controls the key monetary and fiscal levers in the economy has the main mechanisms for managing the national economy."
_________________
Only to the extent that that has been ceded and surrendered politically, by the Scottish government, when they signed and agreed a Fiscal Framework Agreement with the UK Treasury in February 2016.

If the Scottish government DISAGREES with the fiscal framework, REPUDIATES the agreement, refuses to ceded and to surrender those fiscal and economic responsibilities and controls, but joins political battle to win those responsibilities and controls unto the Scottish government then it is a very different political situation.

Scots should be holding Sturgeon to account for disgracefully agreeing to the AUSTERITY fiscal framework and we should be pressing for a new Scottish government, perhaps even a new First Minister, who will dare to challenge the UK for those important powers.

geacher

Wed, 07/12/2017 - 21:12

Well done Peter, ever more ridiculous.
"It is perfectly reasonable to assume that a nation....... will be even better able to effect improvement when freed from the constraints and impediments of a devolved settlement......."
Since when was an £8billion fiscal transfer a constraint?
Since when was the absorbing of Scotland's eye-watering £15billion deficit by Westminster an impediment?

Calum James

Wed, 07/12/2017 - 22:10

Can those Yoonomic commentators tell me how much it would cost to 'separate' us? I mean parting the Tweed and letting us drift off must cost something.

Scott Egner

Wed, 07/12/2017 - 22:52

Yes the usual suspects calling it. 'london provides'.
The public backed/bailed city of london yields high tax revenue. It's a bit like saying a lottery winner is self made. Even martin Wolfe of the FT refers to banks as part public organisations.

We hear the convenient 'success story' of the city's bankers contributing so much to GDP without mentioning that 90% of bank debt based money creation is for speculation - pumped into mortgage and financial markets. These actions are subtractive of GDP. Its articulated very well by Economist michael hudson.
https://youtu.be/mH8FWrbzxEs

Maybe those who view the economic levers as unimportant would be comfortable with the uk joining the euro? Oh let me guess that's different.

MauriceBishop

Wed, 07/12/2017 - 23:29

The fact that joining the Euro as the SNP wanted to do last decade would have been a catastrophe does not somehow mean that leaving sterling is a good idea. What "lever" would that provide and how would it be worked to produce an economic miracle that would astound the world? I refer you again the quote from Krugman. And note that a theoretical lever is not a lever at all - and until you can explain how indy Scotland can have its own currency, control over monetary policy is just a theoretical lever.

James Mills

Wed, 07/12/2017 - 23:57

Reading most of the comments below the line is like logging in to the Daily Mail's comments on anything to do with the Scottish economy . They for the most part support the writer's contention that you cannot have a realistic conversation on Scotland's economy , mostly due due to their blind antipathy to anything that might suggest that Scotland could be independent .
You know who you are !

Peter Dow

Thu, 07/13/2017 - 01:13

"My government is committed to doing all we can, with the powers and resources we have available to us, to provide as much stability and security as possible for everyone in Scotland."
wrote First Minister Nicola Sturgeon for her column in the Evening Times, 11 July 2017
__
UNTRUE!
Sturgeon's government is NOT doing all they can - FAR FROM IT. They are sitting on their rear-ends and refusing to do something very important!

Sturgeon is refusing to exercise the power of the Scottish government to DISAGREE with the AUSTERITY fiscal framework which she AGREED to in February 2016, denying her government the opportunity to press the UK Treasury for £ billions a year more in interest-free borrowing powers from the central bank to invest for growth and prosperity in Scotland.

Instead of fighting Scotland's corner, like the DUP fight Northern Ireland's corner, this wee mouse of a First Minister signed Scots up to austerity because she wanted to agree with HER BELOVED GEORGE, Osborne, the then Tory Chancellor of the Exchequer.

Of course, feartie Sturgeon has not grown a backbone since then, cowering away from any disagreement with the UK master, so pitifully grateful with the crumbs of austerity she begged.

SHAME ON YOU FIRST MINISTER!

Peter Dow

Thu, 07/13/2017 - 01:22

"Groundhog day"?

We've got a groundhog for a First Minister!

When are the Scots going to get past that!

Aye, she comes out of hibernation, agrees an austerity fiscal framework, stuffs her gob with crumbs from the UK Treasury master's table then goes back into hibernation until next year.

MauriceBishop

Thu, 07/13/2017 - 13:59

James Mills, it isn't "blind antipathy" to independence. It is refusal to accept handwaving as a substitute for real explanations of what independence would cost.

Scott Egner

Thu, 07/13/2017 - 20:22

You're making my point Maurice. Control of a sovereign money supply is everything and you rightly say that moving to the euro would be detrimental to the UK.
So to judge and compare the Scottish economy with the uk economy as a whole is a nonsense. Scotgov has all the powers of a glorified local authority. It doesn't have countercyclical powers to react to the business cycle.

Referencing currency, we have been through this before with you yet you seem to fail to understand we are not at Bretton woods. As I mentioned in a previous article krugman has written a few decent articles on the paradox of thrift which I mentioned to you before yet you still hold onto the neolclassical flat earth theory of the economy being like a household.

MauriceBishop

Fri, 07/14/2017 - 15:15

You are in denial Scott. It would cost indy Scotland 50 billion to establish its own currency. The effects would have to be miraculous in order to simply get us back to where we started with a generation. So should we expect miracles? Well, no, because even with the power of perfect hindsight separatists can only identify a very few cases where the ideal Scottish monetary policy might have been slightly different from the monetary policy (set at the UK-wide basis) we actually had.

Mike McMonagle's picture

Mike McMonagle

Wed, 07/19/2017 - 10:21

There are "economists" who put up an argument for an Independent Scotland and there are "economists" who tell us we are crazy to consider such folly.

Then there are those who read CommonSpace scanning for anything they can repudiate with the timeless "ye canny dae that!" arguments. We cannot have a debate or discussion when it is simply turned into a "my expert is better than your expert". Let's stop churning the same old rhetoric and look at the actual costs of setting up a currency system. Scaremongering nonsense about astronomical figures required for Scotland to participate in the economic world are frankly laughable. I could say £75billion to quell your fear of the chase or I could say £10 billion and send you into fits of foaming rage. Both are figments of the imagination. Mere whimsy. The cost will not be known until the ink is dry and the actual figures are available.

The bodies who run giant economies make assumptions, forecasts and budgets based upon their "expertise" and experience. They are wrong so often it's alarming. The Governor of the Bank of England's record on forecasting would make him a poor bookmaker. The world economies are messy at best. So let's beware of forecasts and presuppositions because, while we need gauges we also need balanced vision free from fear and the parameters that creates. Scaremongers scaremonger. They do what they do because they believe they are right. That doesn't mean we should take our aspirations and replace them with someone else's fears simply because they have voiced them over and over (and over) again. Our expert is the expert who supports our agenda. Let's not pretend otherwise. Indeed, let's stop pretending we know better.

Not one of them, for or against, knows what Scotland's actual deficit will be. None. Not one of them knows what Scotland's Currency status would be never mind how much it would cost or how it would perform in the Global Economy. It can be projected, presumed and simply created from a puff but the truth is it will be negotiated if or when the decision is made to secede. Anyone who still thinks current or historical figures pertinent to Scotland within the parameters of the UK is really stuck in a time warp. They are irrelevant.

By the way. We don't vote for Independence because of Nicola Sturgeon, SNP, economy, hatred, team colours or any of that nonsense. We vote Independence to leave the United Kingdom and live as a free grown-up country in it's own right. Making it's own decisions in all of it's affairs and in the unlikely event that we are too wee, too poor and too stupid we will deal with that. It's a gamble, continued austerity with United Kingdom or the possibility of determining our own way forward.

MauriceBishop

Thu, 07/20/2017 - 17:19

There are "economists" who put up an argument for an Independent Scotland

Who? How many real economists - not "economists" - argued the economic case for independence?

I'm not saying my expert is better than your expert. I'm saying that we have in Denmark a real world example of "the actual costs of setting up a currency system". Either explain how our central bank would measure up or explain why indy Scotland would pursue a different, less expensive set of policies and get a good result.

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