It’s good again to want to ‘amplify’ an article published in Source Direct, the daily digital news and opinion bulletin produced by Common Weal! The piece in the 15 June issue is to be welcomed. It’s entitled ‘The changing moods of unionist economics’ and perhaps because I had been musing over broadly related matters, it did resonate.
The Source Direct article sums things up nicely: “Are you keeping up? Before the pandemic, the case for the union was that Scotland is part of a UK state that didn’t need to have a big budget deficit, which Scotland would have, and which would inevitably mean cuts. Now, the case for the union is that Scotland is part of a UK state that can run a big budget deficit, which means enhanced spending. Heads we win, tails you lose. Wherever the mood of the Tories goes with regards to fiscal policy, the case for the union follows.”
Deficits – who cares?
Back in 2018, I was stopped in my tracks when reading this by right wing Tory Brexiteer, John Redwood MP:
“I have not been worried about the state deficit for sometime, ever since Mr (Gordon) Brown found out that the UK state can literally print money to pay its bills. Mr Osborne, originally a critic of this in opposition, then discovered its charms in office as well.”
At the time, Professor Richard Murphy commented in his blog: “… what he (Redwood) has done is let an enormous cat out of the bag. He has admitted there is no need for a government to balance its books. He has admitted QE cancels debt.
He has then admitted the whole ‘passing debt to the next generation’ phobia is wrong. And he has admitted as a result that there was no reason for austerity, the imposition of which served no economic purpose. …. As a result he has, in two paragraphs, shredded the whole economic rationale on which he has been elected to Parliament.”
It is relevant following Murphy’s comments on Redwood and QE above to note that the Bank of England announced in March a £210 billion programme of QE. The Bank’s purchases of UK government bonds overall now totals £645 billion. This figure has been built up in a step wise fashion from 2009 onwards following its first tranche of QE worth £200 billion.
UK national debt
Given the emphasis that Tory political rhetoric over the past decade placed on deficit and debt reduction through austerity, the following graph provides useful context. It does not take into account the latest effects of responding to the pandemic.
And the following graph places the UK’s national debt as a percentage of GDP in an international context. Debt seems to be a common factor in the finances of independent nation-states! The scale of debt relative to GDP is also highly variable over time!
The Centre for Macroeconomics (CfM) is a research centre bringing together experts from institutions such as the London School of Economics, University of Oxford, University of Cambridge and the Bank of England. It recently posed this question to a panel of some of the UK’s leading economists:
“What is the best way to (eventually) reduce public deficits and debt?”
Thirty ‘experts’ responded. In ranking individual policies, respondents were almost equally split between those supporting tax increases and those supporting the issuance of ‘perpetual bonds’, with 30% support for each. A smaller group (13%) supported higher inflation. Notably, not a single panellist expressed support for public spending cuts.
(Perpetual bonds are ones with no maturity date. Issuers pay coupons on perpetual bonds forever, and they do not have to redeem the principal.)
The Guardian on 12 June, 2020 published an article on these findings by the economist Ethan Ilzetzki: “How worrying is Britain’s debt? Surprisingly, we economists say: not very”.
In the piece, the writer tells us that many mainstream economists are now taking a different view of the urgency and the means of deficit and debt reduction now from the views they held in 2008-09: they are now rejecting public spending cuts. The article also notes similar signs of a shift in mainstream economic thinking elsewhere e.g. in parts of the EU and in the IMF, away from austerity-based solutions. Some within the EU are promoting ‘coronabonds’ i.e. issuing debt collectively as 19 countries, rather than as single countries. And the IMF chief economist is now openly advocating stimulus over austerity.
Benefits of agency – it brings options
Independent nation-states across the world – large and small; developed and less developed; with ‘shelter’ within alliances or with little or none – are having to face up to the economic impact of the pandemic and chart their way to economic recovery. What is clear is that all are using their agency over wide ranging fiscal and monetary mechanisms as nation-states.
The Organisation for Economic Co-operation and Development (OECD) has compiled an impressive tracking database with country profiles. This collates and allow comparisons of the economic (fiscal and monetary) interventions that are being undertaken by different countries.
This is a substantial evidential basis to demonstrate that countries of the size and with comparable (or lesser) economic asset profiles to Scotland have the ways and means to ‘cope’. And in the cases of smaller OECD and EU members countries, they may do so just as competently and successfully – if not more so – than the UK.
We often look to Norway or Denmark or perhaps New Zealand to offer examples of how an independent Scotland would cope very well in the ‘big bad economic world’ that our opponents persist in telling us we are too poorly equipped to deal with and that we should fear. But for a change, the scope, scale and detail of fiscal measures listed by the OECD tracker on, for example, Estonia provide a valuable, comparative illustration of what smaller countries can and do achieve. The nature and scale of fiscal responses undertaken by the Estonian government to date are described here:
Source: https://www.oecd.org/coronavirus/country-policy-tracker/ (search term ‘Estonia’)
The same source tells us this about Estonia’s monetary policy response: “The Nordic Investment Bank (NIB) and the Estonian state signed a loan agreement of EUR 750 million to finance the economic measures to mitigate the effects of the coronavirus on 27 March. The repayment deadline for the loan is in the year 2035.” And more: “The central bank lowered the systemic risk buffer requirement applicable for all commercial banks from 1% to 0% from 1 May (announced 25 March). This will free up capital of EUR 110 million.” This is complementing the ‘shelter’ Estonia receives from the European Central Bank.
For a deeper dive into Estonia’s National Central Bank and its monetary policy within the Eurozone see: https://www.eestipank.ee/en/publications/series/estonian-economy-and-monetary-policy
For anyone who’s not a professional economist but is interested in finding out more about the capacity and capability of smaller nation-states to manage and exploit the levers of monetary policy this document may be an eye-opener.
Estonia has a population of c.1.3 million. It has a long land border with Russia.
The nae sayers, doom- and scare-mongers amongst those that oppose self-determination for Scotland on the grounds of economic capacity and/or capability need to have their views exposed to the light offered by evidence-based, international perspectives.