The economic questions about independence have been answered – but are politicians listening?
John Ball, former lecturer in economics at Swansea University
In Nation Cymru on 13th September, Mick Antoniw joined the debate on independence, raising not unreasonable questions about the economics of independence that need to be answered, and I am happy to do so.
What I find disappointing however is that these issues have been raised – and answered – time and time again. Please feel free to disagree, but are any of our politicians actually listening?
The first is currency. The reality is that there is no reason why, in an independent state, the pound could not continue to be used. It is a fallacy to suggest that this is not possible.
During the Scottish referendum debate the Governor of the Bank of England played two hands, one saying that a currency union would be needed for Scotland to use the pound and then, strangely, saying that it could not use the pound at all.
The reality is that the countries of the British Isles already form a currency union based on the pound. Despite the doubtful arguments of the Better Together campaign during the Scottish referendum, to a great extent such a currency union already exists.
The Scottish and Northern Ireland pound, the Isle of Man, the three Channel Islands, British Overseas Territories, St Helena and Ascension Island all of whom to a greater or larger extent issue their own banknotes.
The downside – if downside it is – is that the Bank of England would remain as the Central Bank and thus lender of last resort. In terms of economic stability this would be the best, current option, certainly until any possible turbulence following independence settles.
There are of course other options. In the absence of a currency union so-called sterlingisation would be an alternative, certainly in the short term. In this scenario, the pound would remain the currency but used without the consent of the Bank of England.
The major weakness would be no Central Bank to act as lender of last resort and no control over interest rates – although the latter would still apply with a currency union.
Interestingly, there is an argument that such an arrangement would work over the longer term, as is the case with some Latin American countries that use the US Dollar. Since there is no lender of last resort, such a system requires discipline from the banks, which need to be more prudent and far less likely to indulge in the reckless activities that led to the crash of 2007/08.
There is, in addition, the use of seigniorage, essentially a system where the pound continues to be used on the basis of a “fee” to the Bank of England. The upshot is that, yes, we can continue to use the pound, if we wish.
The use of a non-domestic currency is not unusual. Six countries outside the Eurozone use the Euro, eleven countries the US dollar and seven countries share the East Caribbean Dollar.
If you think about it, the 19 countries using the Euro by definition do not have a domestic currency and ultimately rely on a “foreign” bank (ECB) as lender of last resort.
(There is a strong case for a separate currency, but Mick Antoniw specifically asked whether retaining the pound was possible).
Mick Antoniw also refers to a London “fiscal system” and how independent Wales would be tied to it. We won’t! Presumably by “fiscal system” he actually means fiscal policy; this would clearly be part of Welsh government activity.
He raises the strange question of whether independence means the break-up of the UK’s Welfare State. Well, yes. The UK has one of the meanest and difficult to navigate welfare systems in the world. Welfare will be a responsibility of the Welsh government and like other small states in Europe, will be a priority – and fair!
And the D-word. It’s interesting how the crude number £13billion deficit is eagerly leapt upon by those who want to prove how poor we are without any thought as to how this number was reached.
To address this in detail will make this response far too long – perhaps Mick Antoniw would care to read my responses to this in earlier articles in Nation Cymru, the Western Mail newspaper and Click on Wales – and indeed other commentators.
In summary; both revenue and spending are best estimates – the former is almost seriously understated because business taxes, in particular, are reported at the business’ headquarters, invariably not in Wales.
The latter is overstated; the approach taken by the researchers was the “who benefits” approach (an entirely correct approach to such research), which in this case meant the entire UK. Thus there are expenditure allocations that are nonsense; excessive defence and pension spending and an allocation for HS2 are just three.
In reality, the deficit is almost certainly much less – and incidentally, all countries run a deficit, such deficits mount up and if not reduced are added to the overall national debt, currently standing at £2trillion (£2,000,000,000,000) for the UK.
Mick Antoniw also asks: “Do we really want to leave the UK and the system of wealth redistribution that exists? Walking away from this would drastically impoverish many of those who are already the poorest and most vulnerable in our society?”
Is this is a serious question? What wealth redistribution? Ultimately, wealth redistribution is about opportunity, education and a healthy economy.
I have a message for Mick. In the twenty years since the establishment of the Assembly, poverty has increased, education standards nosedived and the economy is one of the most backward in Europe. On your party’s watch.
Federalism, you suggest. No sir.
No one is suggesting, and certainly not me, that a move to independence will be easy – but the challenge of building a new and dynamic nation is exciting and challenging.
Let’s embrace it!
Dr John Ball is a former lecturer in economics at Swansea University’s School of Management and an expert on regional policy.