Four: Build the case
So if we are to build up people’s confidence by producing a more detailed plan for the establishment of an independent Scottish nation, what should it be like and what should be in it? The bulk of this chapter will focus on a small selection of the key issues where I feel more work is required, with some suggestions about what approach might be taken. But there are a couple of things worth discussing about the general approach.
The one thing this document does not need to be is an argumentative propaganda publication. We will have a full campaign. That campaign can be filled with all the rhetoric, soundbites and publicity material we want. We can develop Q&A briefings by the bucketload, infographics to our hearts’ content, leaflets about anything that takes our fancy. But to generate the confidence that will help lots of Scots take that next step we need concise, serious, detailed thinking on big issues. The less rhetoric there is in the document, the better. Let’s create a plan, not a ploy.
That document should be produced through negotiation. There are a number of reasons for this. First, we need something which will unite the movement and make it easy for everyone to speak confidently about the solutions to the questions of nation-building that people say left them unconvinced the first time round. There is absolutely no doubt that the SNP is the biggest and most dominant part of the independence movement and there is no doubt that it’s influence over this work will be very substantial indeed. But it will do us all good if we can tease out the issues properly in a way that can help us to at least try and resolve differences. Having one part of the movement entirely dictating terms to all the rest was a necessary compromise last time but next time round it will be helpful to everyone if we are united, and united without asking large proportions of the movement to bite their tongues. Collective responsibility is a powerful thing if it can be achieved. We should certainly try.
Another reason why a more open process of producing this work will be beneficial is that more ideas and more good thinking will be harnessed. There are many sympathetic economists, political theorists, legal experts, constitutionalists and social policy practitioners who can contribute very substantially to the development of a stronger plan for independence. The more we involve people, the better chance we have of finding the best solutions to the complex issues. Because of the pace of development required of the White Paper last time round there were cases where solutions were adopted because they were the easiest to put together rather than because they were the best solutions. A wider process will help to improve the case which is built.
I’d therefore suggest that an inclusive steering group should oversee the development of this work with people included both to represent a range of views across the independence movement and to represent areas of specific expertise. The whole process should be overseen by a structure which enables all of the campaign to have a say. Steps are already being taken to see if the Scottish Independence Convention can be repurposed to this end.
There is a corollary of this openness and inclusivity – we need to be realistic. As someone on the Scottish left I am very aware that we can sometimes see an open and inclusive process and conclude that it is time for us to dust off that giant list of ‘demands’ that we keep in our heads. That will do no good. I personally have always accepted that at some point in the future, Scotland could conceivably see a substantial shift to the right (though there is very little sign of it just now and it would take decades).The idea of producing a founding document is not to try and ‘stitch up’ the future by shoving in every part of our own wish lists we can. The purpose is to create a workable foundation for a future nation. This document should not be a political document but a practical one. It is not meant to be a recipe for any specific future, it is meant to be the plans for a kitchen in which all our possible futures can be cooked up.
For this reason we should try and stick to the details of what needs to be put in place and avoid spending time explaining what can be done with them. Once we have the core plans in place, every single one of us can describe how to use that national infrastructure to pursue the future we want to see.
However, we should also be clear that there really is no technocratic solution to creating a new nation, no ‘right answer’ to what should be done. While a constitution or a civil service or a regulatory system should be fit for multiple possible futures, it is impossible to create them with no reference to the values and beliefs of the era in which they are created. As an example, whether or not we have a welfare state is in fact a political and ideological question. If we do choose to have a generous state pension, that is a political and value-driven decision. But if we don’t immediately put in place a means of delivering a state pension, there won’t be one – which in itself is a different kind of political decision.
So an early stage in the process should be to set out those values and basic expectations. It should not be difficult; the idea of Scotland as a democratic and liberal nation state with individual freedoms protected within a cradle-to-grave welfare state is pretty universally shared – and almost completely universally shared among independence supporters. It easily guides us to create a constitution based on international practice on transparency and human rights, an impartial civil service able to serve whatever government is elected, the technical foundations to provide a substantial welfare state and so on. All we have to do is be honest and clear about where we need to integrate specific values into the process and where we need to keep our political opinions out.
Let us assume that we can manage these things and create a process, I would then suggest there is something specific that we should be setting out as a goal. The final report, the final plan, should be as close to a ‘how to’ guide as possible. There is of course scope for integrating a little explanation of why one option was selected over another or why a particular approach was taken. But on the whole it should not look like a discussion document or give the impression of being the minutes of a lengthy debate. It should be a solid, actionable plan. If everyone involved in its preparation was wiped out in some kind of awful epidemic, others ought to be able to pick it up and implement it from what is on the page.
This is crucial. The idea of creating confidence is based not on how well we can ‘tell’ but how specifically we can ‘show’ – there’s nothing like an instruction manual for making you believe that something actually works, actually does what it says it does. It is so much more powerful if what people see is a series of statements which say ‘Scotland will...’ followed by the actions and the numbers concerned. It makes that future concrete, believable. Which is what the next cohort of future supporters of independence want.
The last point to make here is that there is inevitably going to be compromises of scope as well as negotiations between partners. If I was allowed my way I’d have liked to see a monetary economist appointed in the months after the referendum defeat, tasked immediately to begin a substantial process of developing a much better position on currency. Given four or five years I believe we could have gone quite far down the path of having a currency (or at least a currency position) not only designed but prepared for implementation. It’s two years later and we don’t have that time. We therefore need to concentrate on what is essential and what can be achieved in the timescale. For example, if we seek to publish this document by the beginning of 2019, there is unlikely to have been the time to produce a constitution through a process of participatory deliberation among the public. That is a shame – it could have been very powerful if that had been possible. So we need to work from where we are and be realistic.
The list of what might be included in this project is potentially quite extensive and different people will have different ideas. I am therefore not seeking to be in anyway conclusive or comprehensive in the following list. But I am selecting what I think are the biggest and most crucial issues to outline how we might improve our case. In each case I will offer opinions on what solutions might be possible. These are personal opinions; you might well disagree with all of them and yet still agree that a project of this nature is of value.
But there is one final approach that I would like to recommend – simplicity. The regulatory and managerial structures of the British state were concocted over years of addition, amendment and general tinkering. Sometimes they are horrendously complicated and difficult to understand because they have been deliberately designed to be opaque and therefore ripe for abuse (the tax code and its web of exemptions was largely written by accountancy firms seeking to ensure there are plenty loopholes for their clients). But a lot of the time it is just the accumulation of years of attempting to drag out-of-date procedures into the modern world, each phase adding one more layer of confusion.
The simpler and more transparent public life is, the better. It is better for citizens who can understand how their society works. Who really understands how and why tax avoidance is one of Britain’s biggest industries? It is better for the economy where predictability of regulatory behaviour is genuinely helpful (except for the corporations which seek to fiddle and cheat through regulatory confusion). It is better for the public sector which does not require an army of lawyers to help make sense of their own rules. It is more effective and more efficient.
If you want an analogy to this, think about the internet. If the internet had been procured through the kind of public policy approaches we currently use (a good idea, followed by a world of consultants, lawyers, accountants and lobbyists who turn it into a bad idea) there is next to no chance the internet would even work. The fact that it does is almost wholly down to the fact that the internet is at its core incredibly simple. It is based on HTML, a phenomenally straightforward programming language which even I was able to pick up on the basis of a couple of days of very basic training. That incredibly simple foundation which is common across the globe enables people to build upwards – no-one sat down and decided that a video player had to be built into the code of HTML. Rather, HTML easily allows others to create plugins which can play videos. And when those plugins reach the end of their useful life as technology moves on, people can design new ones, not hacked out of the embers of the old ones but rebuilt from scratch on top of that incredibly simple foundation which still enables the internet to work right around the world.
So let’s aim to build in simplicity and transparency wherever we can. And a final plea, let’s try to do it in a language which an ordinary person can understand. There just is no need to start a new nation in the bizarre and impenetrable legalistic language which plagues the one we’re trying to leave. Two days and I can understand HTML. Twenty years and I can still barely understand chunks of the public legislation which defines our society.
Fiscal balance
Perhaps the first and most pressing issue which the independence movement needs to face up to is the national fiscal balance. This problem is probably familiar to most as the General Expenditure and Revenue Scotland report (you probably just know it as GERS). It is the only attempt which is made to assess whether Scotland is able to ‘pay its own way’. And in recent times it has become the source of all those headlines about Scotland’s ‘financial black hole’ which are the stuff of unionists dreams. GERS and the implication that Scotland can’t afford to be independent is one of the biggest issues that face us at the moment.
There has been quite a bit of analysis done over the years on the flaws in GERS and this work has even been accepted and has resulted in changes in the GERS methodology. This in no way means that GERS is now an accurate predictor of the state of the public finances in an independent Scotland; there remains many flaws. Some have suggested that there should be significant work put into revising GERS to make it more accurate. This would be possible, but I’d like to argue that it is a bit like trying to wrestle a hostile animal into submission. Fundamentally, GERS was not devised, designed or implemented by people sympathetic to Scottish independence. And it is also predicated on a comparison with the UK fiscal situation and Westminster government in a way which grants them the status of ‘normality’.
A very crude description of what GERS is and how it works is as follows. First, the UK fiscal situation as a whole is taken as the starting point – how much is raised in taxes and other revenues; how much is spent on services; infrastructure and other public ‘goods’; and therefore what is the resulting fiscal balance, deficit or surplus position. Then the Scottish situation is considered – how much of that UK expenditure and income is ‘Scottish’, how much is ‘British’ (items seen as ‘for everyone in Britain’) and how much is ‘not Scottish’. GERS then goes through a complex subtractive process which tries to allocate to Scotland what is raised and spent here and what is not. At the end of this process a number pops out which purports to show whether Scotland is in a better or worse financial position than the UK as a whole.
The problems are myriad – how do you assign what is Scottish and what is not? how do you apportion UK spending? what assumptions do you make about what was taxed and where and so on? Whether Scotland would be expected to have replicated UK behaviours is not considered at all – so for example, an independent Scotland would presumably not continue to contribute almost ten per cent of the costs of the London Underground or big events like the London Olympics. Whether tax breaks to arms dealers should really be considered ‘Scottish’ expenditure is glossed over. And really big questions about what could be expected to happen in reality after independence is not factored in. For example, at the moment the majority of the value of the trading of Scotch whisky takes place through London and much of the tax revenue appears to be allocated from there. That would not be the case for an independent country where every transfer of saleable whisky to London would become an export. These are only a few of the kinds of complexity which are contained within GERS.
It is a subtractive model. It takes the current situation as it is seen and subtracts and subtracts based on all these assumptions until a number for Scotland results. Whether this represents an accurate picture of the financial situation of an independent Scotland is neither here nor there – it is a paper exercise and no-one believes it is really a description of the balance between Scottish revenue and Scottish expenditure. Disentangling this complexity would be a gargantuan task and would be contested at every stage. Even if we could, we’d still be subtracting from a baseline of UK financial priorities.
There is an alternative possible approach which I think should be considered seriously – to move to an additive system. This would not produce the annual like-for-like comparison with the rest of the UK which unionists enjoy so much but would instead model the financial position of a nominally independent Scotland. Rather than starting with the UK as ‘default normality’ and subtracting, it would involve a process of identifying what would be the expenditure requirements of an independent Scotland and adding them up, then working to identify what the tax base would be and subtracting that (and other revenues) from the total expenditure. This would create a model of the fiscal balance of an independent Scotland
It would be transparent – precisely what was designated as spending in each area would be laid out and could be interrogated. So if calculations are made on the cost of a social security system it would be easy for anyone to see what rates of payment were being proposed and what number of claimants were expected to take up those payments. Which means it would need to be rigorously realistic – this is not some kind of ‘magical’ system for disguising deficit. But it would also make for transparency in assessing the profligacy of the Westminster system. I do not believe it would be possible to design a nation state from first principles and not cut out lots and lots of blatant waste and inefficiency built into the Westminster system.
It would also require us to face up to some important questions, unlike the last referendum where we simply hid behind the UK because there was no time or will to do anything else. For example; tax. London is a virtual tax haven. We were promised Scotland wouldn’t be. So which tax rules would be different and what difference would they make? Would we really just be bringing Britain’s silly tax code with us and trying to take out some of the more egregious failures? Or would we design a new, fit-for-purpose tax system? We can choose to do the former, but I strongly suspect it will be at the expense of our fiscal position. So what is really more important – building the best case for independence or making life as easy for ourselves as we can?
The method of building up this model could draw heavily from international best practice, identifying how the most effective tax-collecting nation states go about doing it and transposing methodologies to Scotland. We could look for the social security system we best aspire to and use that as a cost base to work from. It would not be a walk in the park, but to say that it could prove more than a little important in building up national confidence if it can set out a coherent case for how Scotland can pay its way is probably an understatement. And other than doing some clumsy and very risky things (crossing our fingers that oil prices rebound and that no-one remembers they collapsed; giving very risky permissions for mass-scale fracking in the hope that somehow it will just replace all the oil money), it seems very unlikely that we can just ‘magic away’ fears about fiscal balance.
However, I am still far from clear that this full process would be enough to turn Scotland into a land of milk and honey where we have no problems to deal with. So there may well be other big and potentially controversial issues that we need to look at to resolve fiscal balance issues. During the last referendum the Scottish Government absolutely ruled out any possibility of considering moves such as taking the energy system into collective ownership. There are so many levels on which this was a mistake (and far too much of a sense of cosiness with the energy multinationals who currently profit from our energy system). But one really does stand out – it would create revenue for the Scottish public purse of about £1 billion per year. There are all sorts of assets held privately in Britain which are held publicly in other European countries. All of them generate very substantial private profits for corporations which are almost all owned outside Scotland. If we want to build up a strong fiscal case for Scottish independence we may well want to concern ourselves a little less with the interests of those foreign companies and concern ourselves a little more with making it possible for Scotland to pay its way in the world. (And as an aside, if the Scottish Government or anyone else simply refuses to countenance any of this, then it is for them to explain how they are going to address this massive issue – and another PR campaign is not it.)
For reasons of complete transparency, we should also make clear assessments of the start-up costs for all of these new systems (and possibly describe methodologies for getting them set up). There will be borrowing to fund these one-off costs and probably for other things such as setting up a central bank and a foreign currency reserve. These should be priced and modelled. However, we should also be assertive in setting out how much of the UK’s national debt we would be willing to accept. As will be discussed in Chapter Seven, this need not be as high as people think. But either way, we would be crazy not to subtract all the start-up costs of the new nation state from that total debt accepted – so there is no need to pretend there aren’t start-up costs. Let’s just budget them in and dispose of all those arguments about being vague about start-up costs.
So the first thing the document should do is to set out a detailed budget for the first year of an independent Scotland with the costs of set-up in its borrowing column. Let’s spend time devising the outline of public services and the tax regime to ensure that we can present a compelling and verifiable case. Let’s work on it until we are confident that when we put it out into the world independent voices will consider it credible. If we can do all of that we can focus on a campaign which is not permanently on the back foot asking ‘how everything will be paid for’ or implying that Scottish citizens will be subject to a massive drop in their quality of life. With work, this is possible.
Currency and banking
Most people would then cite currency as the next biggest issue which needs to be resolved. I believe that is correct (even though there is an argument to say that pensions may have had a more direct impact on the outcome overall). That is because it became such a totemic issue for the independence movement’s lack of preparedness. So whatever we do next, we must make sure that we are seen as being prepared.
Now the currency question is complicated, entailing important economic questions, central strategic ones about how much risk people are willing to take and a host of complex technical questions. There isn’t a ‘right’ answer to all of this. While I support an independent currency pegged to Sterling, there is merit in arguments supporting continued use of Sterling. There is then a complex question to be asked about whether that should take place in a formal currency union (by far the most restrictive option on the table) or going for Sterlingisation (a very workable solution but one which can be presented as odd and risky).
For the sake of disclosure, I’ll outline why I favour an independent currency. The downsides are that the set-up costs and procedures will require a lot of work in the early days after an independence vote. It would require a foreign currency reserve. This is a large amount of the money of other countries which are held to ‘underpin’ the new currency and reassure people the currency is a safe bet. It is also used to ‘peg’ the currency (make sure it maintains exactly the same value as Sterling) – you can buy and sell various combinations of Scottish and other currencies to affect the value of the Scottish currency and so keep it at the same price as Sterling (a Scottish pound and a pound Sterling would then always be worth exactly the same amount and would be exchanged on a one-for-one basis). To maintain parity a Scottish foreign currency reserve would be in the order of £10 billion to £30 billion. That may sound large, but to put it in perspective, that is about Scotland’s share of the UK’s debt interest for only two or three years. And of course it’s a giant pile of money that you have...
You would then need some form of central bank to hold that reserve, guarantee the currency, regulate the monetary system and act as the ‘lender of last resort’ (the institution which bails out everyone else in the event of financial crisis). That would take a fair amount of work to design and set up, and whatever was done in the area of regulating bankers will kick up a fight (refusing to be properly regulated is what banks do these days). It would be quite a big undertaking.
Then you would need to address questions of internal UK trade and whether people would need to exchange their money at the border every time they came to Scotland or left again. For individuals this is not nearly as complicated as was implied during the last referendum – many shops accept Euros and since Sterling would be one-for-one exchangeable with a Scottish currency it would be easy to have the dual use of Sterling and a Scottish pound. It is a bit more complex for larger financial transactions, particularly between businesses. But again, not the insurmountable challenge that was implied by opponents of independence last time round.
The other aspect of a Scottish currency which was regularly raised was that it would make it much harder to borrow in the international money markets. It is true that for a period borrowing costs would rise a little, though once again for a much shorter period and by a much lower amount than was implied last time. Some of that is just the price of independence and would not be as high as made out (particularly depending on how much UK debt Scotland acquired). But if we pair this with the creation of a Scottish National Investment Bank, the establishment of a Scottish Government Bond (like the UK’s gilts, which some people have called ‘kilts’), and a better borrowing strategy for national infrastructure, it would be perfectly possible to ensure an environment in which Scotland had more than enough borrowing capacity. In fact, since Scotland can set up a national investment bank right now, by the time independence arrived it could be capitalised to a level designed to meet this need and a bond system could also be in place.
So these are the ‘downsides’ – but in every case the downside comes down to ‘its hard work’, ‘it involves a bit of investment’ (though that should be completely offset by accepting less of the UK’s debt responsibilities) and ‘bankers might not like being regulated’. On the last of these points, as well as setting up a national investment bank, the Scottish Government could set up a secure People’s Banking Network to ensure security of banking services locally. This is discussed in more depth in Chapter Five.
The upsides? It turns an independent Scotland into a properly independent nation with proper control over its regulatory, fiscal and monetary policies. It can mirror UK approaches for as long as it wants but whenever it wants to take a different direction it can. And come any crisis it can respond properly (like Iceland) and not be stuck with the inevitable British failure to do what is needed (like last time).
But there are bigger upsides. Largely unspoken during the last campaign but acknowledged pretty universally by every economist and business person I spoke to, the other options could only ever be transitionary. In the long term it is inevitable that the monetary interests of Scotland and the remainder of the UK would diverge (you can argue they already have) and it is inevitable that this divergence would eventually create unavoidable pressures to either create an independent currency or at least join a broader currency union (like the Euro). And since both the short and long term prospects for broad currency unions are not promising, everyone I have ever spoken to believes that it is extremely likely sooner or later Scotland would have its own currency. So I am pretty strongly of the view that we should bite the bullet now and set things up properly. I can’t see that going through the enormous transition of creating a new country would be helped by leaving this massive unfinished task to be addressed, possibly just at the point that all the transition had just settled down (round about ten years is the timescale most people I know thought that a Sterling union would survive – and that assuming there isn’t another financial crisis). Creating a new nation will involve a bit of turmoil (and if we’re clever it will be creative, positive turmoil). Setting up the likelihood of new turmoil in the immediate future does not seem like a wise decision.
Finally, as will be discussed in Chapter Seven, not making this decision at the outset has one other big problem to it which is that we lose the ability to factor in all the implications when we are negotiating. It is a very reasonable expectation that in lieu of our stake in Sterling we would be able to write off the cost of setting up a foreign currency exchange from our allocation of debt during negotiations over separation. But once that is agreed, once the paper is signed and once we are an independent nation state, that option is immediately off the table and everything we do from then on will cost us. I’ve heard people argue that the ‘cobble something together and then wait and see’ is a kind of buy now, pay later scheme. In fact I think it would be a pay now, pay later scheme.
Incidentally, I believe that much of the approach taken in the last referendum was more about strategic positioning than solid monetary policy. It might be reasonable therefore to assess this proposal in terms of strategy. Is the prospect of imposing an entirely new currency on the Scottish population more likely or less likely to encourage them to vote Yes? But here’s the thing – it is only possible to make that assessment if you are able to measure certainty against certainty. If we could at least appear to guarantee that Scotland would keep Sterling with a lender of last resort, it might be possible to test that against the alternatives to assess public mood. The problem is that it is this above all which failed in the currency position the last time.
Put simply, I continue to believe that the UK would indeed agree to some form of currency union (though I remain pessimistic about whether the terms would be in Scotland’s interests) – but next time just like last time, we can guarantee absolutely nothing. If they say no in public, all our plans and schemes for reassuring the public are shredded. This is what happened last time. A cautious, conservative position was taken to prevent people from being scared. It failed completely because it was so easy to undermine. People then feared they wouldn’t have Sterling but they didn’t even have the bare bones of a plan for how to set up a Scottish currency. So (in my opinion) the ‘reassuring’ option ended up less reassuring than the ‘risky’ option. Had we committed to a new currency we would at least have had a definite position which was in our hands to promise. We ended up with an answer to this crucial question which was entirely in the hands of our opponents and they could deny us that answer at will (and make no mistake, the UK really could very easily deny an independent Scotland access to the Bank of England if it wanted to be pig-headed).
There isn’t that much work that is required to make the case for Sterling union again. But it will fail in precisely the same way again. It is my impression that by far the majority of independence supporters would really like Scotland to have its own currency and to get out of the disastrous UK banking system. But, as I made clear at the beginning,