OpenSpace Q&A with Dr Craig Dalzell: Chatting currency, GERS and more

All the questions and answers from the OpenSpace Q&A with economic researcher Dr Craig Dalzell

Dr Craig Dalzell is a researcher for Common Weal and he was online answering your questions on currency options and more from 7-9pm on Wednesday 31 August. His recent look at post-Brexit currency options for Scotland was covered in both the Herald and the National, and has been a talking point on social media. He has also looked at the recently released GERS figures and the economic case for APD.

If you missed it, don’t panic: We’ve collated all the questions and answers below, and they are also available to download as a document over on the OpenSpace page on CommonSocial. We’ll be uploading all the Q&A sessions hosted on OpenSpace to CommonSpace, and as downloadable documents that you can use as resources to share or start a discussion, so even if you can’t be online when a discussion is happening you can still get involved.

Join the OpenSpace page on CommonSocial now to make sure that you stay up-to-date with all the upcoming guests and what they’ll be talking about. If you’re not on CommonSocial, our editor Angela Haggerty has written a wee guide on how to sign up, and once you’re on you can join OpenSpace, or any other space you have an interest in and get a discussion started!

 

Dr Craig Dalzell

Good evening everybody.
I see there's already a few questions up so I'll make a start on them. Keep them coming in.

 

Q:  David Inglis

Good afternoon Dr Dalzell,
We were chatting with Robin McAlpine last night regarding GERs and he raised the very interesting prospect of creating a report/sample budget for an Independent Scotland. This would replace GERs and include all incomings/outgoings so we can get a realistic picture of where the shortcomings are. Where would it be possible to get access to the data for such a report?

Additionally I think it is worth looking at the defecit and being realistic about it rather than denying it exists. I think it would be excellent to come up with some propositions about how it can be solved.

A: Dr Dalzell

Hi David

As Robin mentioned, Common Weal is looking into creating a sample budget for an independent Scotland and we're developing the methodology for it just now.
Much of the data can be modelled directly - If we know the pattern of income in Scotland, we can model the revenue from a certain income tax, for instance.
We can also plan certain expenditure measures, the cost of a Citizen's Income or a Scottish military, to fair degree of precision.
Some other things may be a little more assumptive (different assumptions about VAT between the methodologies developed by GERS and HMRC lead to a difference in revenue estimates of more than £1bn per year) but we'll be as forthright as possible about such cases in the report.
As for the deficit, we'll see what happens with that as the independence budget develops. There are cases of money being spent "for" or "on behalf" of Scotland which would not need to be spent by us just as there quite possibly will be cases of taxes which currently accrue outside of Scotland due to how companies are structured.

 

Q: Rab Hay

Hey Craig,
Concerning the GERS figures surely the point of Independence is to do things differently from his it is done now, to shape our economy to our needs and our strengths. The fact we would t have to contribute to HS2, Lobdob Sewers or the renewal of Trident would surely cover any deficit if there was one.

A: Dr Dalzell

Hi Rab.
These are substantial items, possibly totaling on order of 10's to 100's of millions of pounds per year, but they won't close the deficit by themselves. This isn't to completely discount them though.
We're going to be publishing a paper later this week on debt which, whilst I don't want to say too much till it's out, will be of great interest to those looking for similar savings.
As I mentioned to David below, we're going to be working on a budget for an independent Scotland build from the ground up and free from many of the preconceptions built into GERS and suchlike. We shouldn't be basing ourselves too much on line-by-line comparisons of the Scottish budget compared to the UK one, any more than the UK makes comparisons between itself and, say, France.

A: Rab

I know it's not over one year but for example our 10% of the cost of renewing Trident could be anything from £15-25 billion. Anything we save will hopefully be put to good use, thanks answering that for me.

A: Dr Dalzell

£25 billion over, say, a 40 year lifespan is £625 million per year. Not to be sniffed at, by any means. Not quite closing a £15bn deficit on its own though.

It couldn’t be easier to sign up to CommonSocial – just follow these simple steps:

Q: David Francis

Craig,
How relevant is GERS after Brexit vote/Brexit?
Are there areas in GERS where the UK Govt restricts access to full information/transparency re figures?
How accurate do you think GERS is, in any case, for an accurate representation of Scotland's fiscal-state?

A: Dr Dalzell

1)Whilst we're still in the UK I don't think the relevance of GERS has changed all that much due to Brexit. It simply is as it is.
2) "Restricts" is a strong word but there is plenty of data which is difficult to get for a Scottish perspective (which, if you are the UK government, may be understandable). One can find, for instance, 1% resolution data on UK income distribution but getting Scottish data to that degree doesn't seem to be easy. Maybe the Scottish Government has better access than the lay public but if they do, they're not talking about it much either. Margret Cuthbert talked recently about calling for far better analysis and publication on any areas like this that the Scottish Government can get in to. I agree and endorse that message. If we're going to talk about our country, we need to know what it looks like.
3) GERS has substantial limitations. I can see direct discrepancies in, as mentioned earlier, defence spending and debt but these could be explained away by Scotland simply contributing to the "pooling and sharing" within the UK, if you hold to such things.
Other, indirect discrepancies may be less clear. According to GERS, Scotland pays a lot less than our population "share" of income tax, corporation tax and VAT (On the order of about £3bn less than our "share" per year). This could be due to lower patterns of income in Scotland, though I've seen reports to the contrary, or it could be down to large companies with HQs and HR depts based in London hence the tax appearing on those books. How this picture changes now that Scottish workers have their own distinct tax code linked to their place of residence, rather than place of work, remains to be seen.
This all said, even if the numbers are entirely accurate they simply wouldn't reflect the financial status of an independent Scotland. There's far too wide a gulf of change between the two.

Q: David

Thanks for that response.
GERS is THE set of annual figures used by most of the MSM/Unionist Parties to challenge the viability of an Indy Scotland being able to maintain its current spending patterns.
The famous £15 Billion Black Hole so beloved by Kevin Hague and others - how much is this fantasy projected economics as opposed to hard reality?

A: Dr Dalzell

As I say, there are limitations to GERS but there's a more fundamental point to be made here. If they are claiming that Scotland *as part of the Union* is in £15bn worth of deficit then that's not a particularly strong advert for that Union. I doubt even they would wish to join one which would *cause* such a deficit.

Q: David

Craig,
I totally agree - but this is not the way GERS is framed by BBC/MSM.
GERS is always framed as Scotland's Deficit, with absolutely no mention made of under whose overall stewardship it occurred.
The deficit is then always portrayed as a millstone so huge around Scotland's neck, that Indy would break its back.
GERS will be back to bite us again next year, unless we can change the frame of reference around them. 
Any rational, reasonably quick suggestions?

A: Dr Dalzell

This is one of the major reasons we'll be writing our own independence budget. So that we can show how Scotland can be different and better if we start thinking from the ground up rather than just try tweaking "what we have".

Q: David

Great stuff - it will be a welcome change to merely reacting to GERS.
Of course, you do know that your figures will be the subject of intense scrutiny.criticism by the usual suspects?
Best of luck with your bullet-proof vests!

A: Dr Dalzell

They already have been and I welcome it. It's the scientist in me. Every opinion should be tested. If it stands, keep it. If it falls, discard and move on.

 

Q: Rab Hay

What do you feel about what Joseph Stiglitz said about the currency issue?
I feel we will need to have our own Central Bank, one that doesn't take the risks that Lehman Brothers did or that Deutsche Bank are now. Is that a Utopian ideal or is it possible to have an ethical bank, or is that what many would call an oxymoron?

A: Dr Dalzell

My own report into currency options for an independent Scotland can be read here.
Stiglitz's comments were welcome, considered and measured. I'm glad we're able to talk about these options a lot more openly than perhaps we could previously.

The only particular area in which I differ with Stiglitz is in the peg/float. He favours a float I would prefer an *initial* peg to Sterling for the transition then opening the options for examination. Personally, I have a great deal of time for a managed or variable peg as Australia used for many years.

Under this we'd take some measure (say, our % of exports to our main currency areas. Right now that would be 60% GBP, 30% EUR, 5% USD 5% Other) and peg our currency to that basket. If our market changes (as Ireland's did. Immediately on independence, >90% of their exports went to the UK. Now it's more like 20-30%) then our currency would stabilise with respect to that.

A float would largely do the same although may react faster to rapid changes (your export measurement report could be a year out of date by the time it is published) but you'd be trading off against things like market speculation causing day to day volatility.
Either system would work. It's really just about which risks you want to manage rather than which option is better or worse.

As for banking. Banks are more likely to be amoral than ethical. Governments can choose to be moral though. We could demand ethical regulation of the banking sector. If that's done *and enforced* then we might do well out of it.

 

Q: Daibhidh Ceannadach

Hi Craig, do you have any experience of using digital currencies like Scotcoin, and to what extent do you see them running in parallel to a traditional (albeit new Scottish) currency?

A: Dr Dalzell

I own a few thousand Scotcoins and I've dabbled with Bitcoin in the past (though I don't own any at the moment). I have even managed to make the odd actual purchase with them.
And that's the real key. Right now, as I see it, a lot of digital currency is difficult to spend and much of the movement of them lies in speculation and forex rather than the "real economy". Until that changes, it'll be difficult to make any predictions as to how it'll work.
This is a classic chicken and egg problem though. Acceptance comes with use but use comes with acceptance.
I do mention in my report some of the technical challenges still to be fully addressed (scalability and long term sustainability seem to be the big ones) but these are probably not fundamental blocks. They'll get fixed just as soon as someone sits down to fix them.
One prediction I will make is that if one of these digital currencies ever does really take off, I think it's unlikely to look much like the ones we're using just now - at least under the hood.

If you’d like to be involved in future Q&A sessions, head over to OpenSpace now!

Q: Al Pacino

Hi Craig. 
I have a couple of questions on crypto currency and another to follow separately. 
Bitcoin famously crashed in value and a lot of people lost a lot of money when the Mt Gox. website was hacked. Can you tell me if Scotcoin is any more secure, and if not, is it reasonable to expect a cryptocurrency to be secure in the age of supercomputers?

A: Dr Dalzell

I don't have any information on how secure Scotcoin or similar is or would be compared to the failings which caused that attack.
It's also impossible to say how secure anything is long term in this age of rapidly advancing infowar (side note - if any of you have a password for anything which contains fewer than nine characters, it can now be hacked faster than you can read this sentence. Change it.)

I have no doubt that one day, probably sooner than we'd like, the first cryptocurrency will be broken as in someone will manage to crack the fundamental key on which it is built (rather than simply raiding the bank, as in MtGox). That'll be a major blow to the community but right after that, the first currency immune to *that* hack will launch and the arms race will continue.

A: Al

Thanks

 

Q: Al Pacino

Last question. When the NEF proposed a digital currency as part of a project with Common Weal, I was told that it would be more secure because it would be completely transparent (but would however lack privacy obviously). 

This seemed like a good idea because it would build public confidence. They did however say they would need to raise money to make it happen. Do you know how much this might cost roughly, and do you think it is something which could be crowdfunded?

A: Dr Dalzell

Sorry. I'm not directly involved with that project so don't really have those numbers to hand.
Their website is here though. Maybe it contains more information.

 

Dr Dalzell

Remember folks, there's no such thing as a daft question, only a daft answer. So in that sense it's all on me! Anything you want to ask, go for it.

 

Q: Stuart Bates

Craig
If we created a Scottish Pound which was pegged to the British Pound even initially, how could we have any influence over monetary policy with the British banking establishment? Would it not be better going for the pegging to the basket of economies you previously talked about?

Also, what is your view on the call for the immediate creation of a Scottish Investment bank from individuals and groups, anticipating the need for Scottish Banking funds and overseen by the Scottish Government or an independent currency body?

A: Dr Dalzell

There's a section in my report which deals with the "Impossible Trinity" of economics.
Current economic thinking tends to favour: 
a) an independent monetary policy
b) a stable exchange rate
c) no capital controls

But the trick is, you can only fully pick two.

My reasoning for *initially* pegging to Sterling is to minimise disruption during the transition process. This would leave us with the choice of *either* mirroring rUK monetary policy OR instituting capital controls to prevent money flowing in or out of Scotland uncontrollably.

Note that the option of capital controls is currently something that Iceland does to a good degree of success and it's also something the UK used to do under the old Bretton-Woods system which coincided with that great post-war economic boom.
There's a growing body of economic thinking which is starting to look upon controls favourably again, particularly with regard to limiting "hot-money" flows as Iceland does. Indeed, this may even be a good idea whether we're on a fixed peg or not.

Even if we chose simply to mirror rUK policy then, unlike the case of a full currency union, we would retain the sovereignty to change our minds the moment we deemed it necessary, either because the "froth" of the separation has died down and we want to go our own way, or if rUK really pulls a number and their policy becomes obviously and immediately detrimental. I didn't put a timescale on the duration of the initial peg because I feel that it should be indefinite in the sense that if it's still working better than a float, keep the peg but I also envisage it not being permanent. It could be something held for the first Parliament and then the various parties could campaign on their own monetary policies positions in the next election, for instance.

On the National Investment Bank, yes. I'm within that group calling for it to be created now. We can do it (albeit in a slightly limited fashion) with existing Scottish government powers (particularly over the new ability to borrow by bond issue). It's going to be essential to building up the Scottish economy and the sooner we get started, the better.

A: Dr Dalzell

It's worth noting that once we're independent and have our own Central Bank there may be scope for folding the NIB within its sphere, if appropriate. 

The Bank of England is a fairly non-interventionist central bank but the Norwegian Central Bank is an example of the opposite (in a sense). Norges Bank has control over the overseas investment portfolio of their oil fund. There's no reason why a Scottish Central Bank couldn't do similar within Scotland. Plenty of other Central banks around the world do more to invest and intervene within their respective economies than the BoE does with ours.

 

Dr Dalzell

OK folks. Time to wrap up for the night. Thanks for all the questions, I hope it's been useful and informative.

Just to finish off by saying that I've mentioned some of the research and policy plans we have for the future. If you'd like to help us get it done (and bearing in mind that, as of yet, no-one else is doing it!) then one way would be to consider a donation to Common Weal: allofusfirst.org/donate

Thanks again for the questions. I hope I can come back again some time. Till then, oidhche mhath!

Stuart Bates

Thanks Craig. Great to have a chance to discuss these issues. Hopefully get the chance to do a local meeting with you soon.
Stuart

Rab Hay

Thanks Craig I think we would all agree that was extremely informative.

Anne Morton

Sorry I missed this...will read up the conversation.

 

Pictures courtesy of CommonSpace

Check out what people are saying about how important CommonSpace is. Pledge your support today.