Currency union is now sunk – time to launch Plan B

As the Red Paper warned in 2012 (People Power – Fiscal Implications of Constitutional Change), the currency union was always a flawed concept – for Scotland as well as the rest of the UK. The statements by the Governor of the Bank of England, The Chancellor, The Permanent Secretary to the Treasury and Ed Balls – means it is dead in the water. 

Alex Salmond’s response is more ‘bluff and bluster’, with the ‘bullying’ charge the most absurd. As Scotland has the right to self-determination, so does the rest of the UK. If they choose not to join a currency union then that is their right. There are very good reasons why they don’t want a currency union and these were clearly articulated by Martin Wolf in his Financial Times column. Equally, the notion that Scotland owns the pound and the Bank of England is frankly risible. We may be entitled to a share of the assets and liabilities of the UK, but if we separate, we also separate from the institutions of the UK. Independent countries create their own institutions. 

The Permanent Secretary to the Treasury has taken the unusual step of publishing his advice to ministers on this point. His key reasons for ‘strongly’ advising against are worth reproducing in full: 

“First, the Scottish Government is still leaving the option open of moving to a different currency option in the longer term. Successful currency unions are based on the near universal belief that they are irreversible. Imagine what would have happened to Greece two years ago if they had said they were contemplating reverting to the Drachma. 

Secondly, Scotland’s banking sector is far too big in relation to its national income, which means that there is a very real risk that the continuing UK would end up bearing most of the liquidity and solvency risk which it creates.  

Thirdly, there is the problem of asymmetry. The continuing UK would be at risk of providing taxpayer support to the Scottish financial sector and sovereign. An independent Scottish state would not face the same risk as it is inconceivable that a small economy could bail-out an economy nearly ten times its size. This asymmetry could only cause continuing UK problems unless Scotland is prepared to cede substantially more sovereignty on monetary and fiscal matters than any advocates of independence are currently contemplating.  

Finally, Treasury analysis suggests that fiscal policy in Scotland and the rest of UK would become increasingly misaligned in the medium term. Of course, if the Scottish Government had demonstrated a strong commitment to a rigorous fiscal policy in recent months, it might be possible to discount this. But recent spending and tax commitments by the Scottish Government point in the opposite direction, as do their persistently optimistic projections of North Sea revenues, which are at odds not just with the Treasury but with the Office of Budget Responsibility and other credible independent forecasters.” 

Instead of digging himself into an even bigger hole, the First Minister would be well advised to develop a credible Plan B. Brian Wilson summed it up, robustly but well in the Scotsman. Playing the victim might get some short-term traction, but the closer we get to the referendum, voters will be more focused on the impact currency uncertainty has on their savings and pensions.

The irony is that there are other options available. Some have even been suggested by his, much vaunted, Fiscal Commission. Others in the Yes camp have fairly argued that a currency union is not in Scotland’s interest, as did Martin Wolf. We shouldn’t forget that the currency union is actually a U-turn for Alex Salmond. In 1999 the SNP favoured joining the Euro, later that year he described the pound as “a millstone round Scotland’s neck”. 

The risk is largely political, not economic. The focus groups say keep the pound, so a strategy has to be found to keep the sinking ship of the currency union afloat. Sorry, but that ship has now sunk, so he needs to develop a credible Plan B and win political support for it. The longer he puts off the inevitable, the more difficult that task will be.

Scottish Labour must be bold on devolution

Scottish voters are entitled to know what type of devolution they will get if they tick the No box this September. While the pro-devolution parties are all working separately on their proposals, it is Scottish Labour that is expected to take the lead with the publication of the Devolution Commission report.

There has been much media excitement about ‘splits’ and ‘chasms opening up’, following statements by Ken Macintosh MSP and Ian Davidson MP. Devolving income tax would be “independence by default” claimed Ken, who is assumed to be the outrider for Jim Murphy MP. Ian Davidson MP claimed the proposed move would damage the Barnett Formula.

Of course there is no show without punch, in the form of Alex Salmond, who claimed that Labour’s “bitter in-fighting” over plans to increase the Scottish Parliament’s powers, has made it impossible for the pro-UK campaign to deliver a positive alternative to independence. Leading a party that, with some honorable exceptions, hardly ever questions the great leader, the concept of political party having a debate must seem a bit strange!

I disagree with Ken Macintosh and Ian Davidson on this issue, but they are perfectly entitled to argue their corner. I don’t accept that all MPs, including Ian, hold to this view because “their power and influence will be ¬diminished”, or because they believe it will lead to a cut in the number of MPs at Westminster. Of course there are still some MPs who have never liked the Scottish Parliament, but they are now a much diminished group.

I support the devolution of all taxes on property and income; while retaining business and consumption taxes at the UK level. This would require a balancing mechanism and greater borrowing powers. With such flexibility we could finally get rid of the huge cost of PPP/PFI schemes by giving prudential borrowing powers to health boards, NDPBs and public corporations, including Scottish Water. Most importantly, we would also largely be spared from the financial consequences of public service reforms in England. A point ably reinforced by the IPPR, Devo-More proposals.

Fiscal devolution would enable at least a modest challenge to neo-liberal economic orthodoxies, recognising that the SNP’s approach to independence would operate within the constraints of fiscally conservative policies, particularly with its plan to reduce corporation tax. On the other hand, Devo Plus strategies that rest on the ‘moral hazard’ that occurs when a parliament spends but does not raise revenue, also adopt neo-liberal ideas and limit powers for redistribution. Fiscal policy should support the creation of a more equal society.

But this debate is about more than economics. The driving force for advocates of Home Rule, back in the 1880’s as now, is support for decentralisation, re-distribution of power and extension of democracy as part of the wider struggle to win working class power over the economic, political and industrial decisions affecting their lives. Extending devolution gives Scotland the ability to do things differently, Scottish solutions to Scottish challenges, without undermining the solidarity of the UK.

All the polls make it clear that the majority of Scots want to see a strengthened form of devolution short of outright independence. Scottish Labour has to pitch a radical solution on powers and a vision of the sort of Scotland we could create with those powers. Anything short of that would be a failure of leadership and encourage a drift to independence.

Pensions and independence – the unanswered questions

ICAS – the professional body for Chartered Accountants has returned to the fray on the subject of pensions and constitutional change.

They published a useful introductory paper on pensions and constitutional change last year and I blogged a commentary here. Since then the Scottish Government has published a paper ‘Pensions in an Independent Scotland’ and the White Paper. The aim was to reassure voters that their pensions will continue to be honoured in an independent Scotland with continuity of systems and regulation. I published a commentary on this here.

ICAS has had a further look at these publications and has identified a number of areas of concern:

• There remains no clear plan as to how the Scottish and UK Governments will engage with the EU on how to minimise the impact of the cross-border funding rules on defined benefit schemes carrying deficits, which become cross-border schemes, in the event of independence.
• The three year transitional period being discussed by the Scottish Government for addressing pension deficits held by new cross-border schemes is likely to be wholly insufficient as many UK employers currently fund scheme deficits over a much longer period.
• We have further questions about the feasibility of an independent Scotland sharing pension protection arrangements with the UK while establishing a separate pension regulator.
• We anticipate additional complexity than is currently acknowledged in relation to whether an individual’s entitlement to a state pension at the date of independence would sit with an independent Scotland or with the UK. Similar issues arise in respect of entitlement to a pension from an unfunded public sector pension scheme.

David Wood, Executive Director, Technical Policy and Practice Support, said:

These Scottish Government papers have provided useful additional detail in relation to pension regulation and provision in an independent Scotland but some of our key questions remain unanswered. While we recognise that it will not be possible to answer every question prior to the Referendum, nevertheless important questions remain on how legacy issues will be resolved and new arrangements will be implemented.”

On public services pensions ICAS believes that these questions need answering:

• What should the criteria be for determining which government would be responsible for the pensions of individual members of unfunded public sector pension schemes – for example, members of the Armed Forces Pension Scheme; the NHS in Scotland Pension Scheme and the Principal Civil Service Pension Scheme?
• What other transitional arrangements would be needed to successfully migrate responsibility for scheme members living in Scotland at the date of independence, including member communications?
• How does the Scottish Government propose to define “living in Scotland at the date of independence” or “country of residence at the date of independence” for the purpose of determining responsibility for paying the pension of members of an unfunded UK scheme? Issues of citizenship may be relevant here as they would be in relation to the State pension.
• What amount or reimbursement would the Scottish Government seek to negotiate from the UK Government by way of providing pensions for those with “accrued” entitlement to a pension from an unfunded UK scheme?

For UNISON members the allocation of costs for ‘unfunded’ or ‘pay as you go’ schemes is an important issue – primarily for the Scottish NHS scheme. While we have the global liability figure in UK government accounts, this is fairly meaningless. I am surprised that the UK government has not asked GAD to undertake a more detailed analysis of this.

Reimbursement is not an issue for local government as the funding is already devolved and independence would make little difference. In fact UNISON has argued that this should be fully devolved to Scotland. In our private sector schemes, separating the funds could be a way around the EU rules. However, in some cases this could leave quite small schemes that may not be viable, or at the very least more expensive to run. In pension investment, bigger is usually better.

Both sides in the independence debate should recognise that pension security will be an important issue for many voters. It is their deferred pay and represents a huge investment for many workers. This ICAS report raises further important questions that deserve proper answers.