IN a meeting in Portugal this week the heads of many of the world’s major central banks, including the Bank of England, said that they were convinced that the era of low inflation and low interest rates was over. In the context of this week’s announcements on a potential independence referendum this is interesting.
That is, of course, because issues relating to the future currency that Scotland might use are going to dominate that independence debate if it happens, whatever the SNP might want.
In that case it is important to consider whether Scotland might be in a better place to handle the currency crises to come (assuming the central bankers are right) as an independent country or as part of the UK.
This discussion needs to be put in context. The UK inflation rates is running at 9% right now and is expected to increase to 11% soon, albeit everyone thinks it will then fall. Interest rates are rising, and whether appropriately or not (and I think not) are going to rise quite a lot more if the Bank of England has its way. And just in case that’s not bad enough, the pound is plummeting against the dollar at present in a way not seen since Brexit happened.
I believe the economy is already in recession, and if the Government fights pay rises for working people, as seems to be its intent, then this can only get worse. To pretend that things are going well for the UK in financial terms right now is very hard indeed.
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The question is why is this? The Organisation for Economic Co-operation and Development thinks the UK might do worse over the next three years than any equivalent economy. The reasons aren’t hard to find.
First, there is Brexit. That this is calamitous is now undeniable. If, as expected, Brexit will cost the UK 5% of its national income then it is, by itself, enough to suggest why we are doing so badly.
Then we must accept that the Bank of England has a poor track record when it comes to crises. 2008 proved this. The reason is its dedication to the pursuit of economic dogma rather than the pursuit of pragmatic economic management. Because it believes that raising interest rates stops inflation (which is only true if an economy faces excess demand because households have too much money to spend, which is the exact opposite of the position we are in) the bank will raise rates over coming months, come what may. And right now they say they will keep doing so whatever the resulting economic pain for those on low incomes who will, inevitably, be hit hardest.
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And third, since we are facing recession, the Government should be planning an economic stimulus right now to help the economy recover. Instead, it wants to cut civil service numbers by 20% and make everything very much worse.
Add all this up and the UK is in a decided economic mess right now, but almost entirely by choice. With better decision making this situation could be avoided. For example, inflation could be tackled with tax cuts on essential items and tax increases on the wealthy. Interest rates need not rise. A Green New Deal could be planned. A constructive approach to the EU could transform trade matters. These options are all available.
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My question then is a simple one and is this: Could Scotland be relied on to make better decisions than Westminster does now when it comes to managing the economy post-independence? If it could be, then Scotland has everything to gain from leaving the UK. It could hardly do worse, after all, when the UK is doing so badly right now.
But, and that is a crucial but, that requires that the SNP start talking about what they would do to address the macroeconomic issues that we face now, because that is the way to build confidence in their economic judgements. That’s not happening at present. It needs to. If the SNP are serious about winning the confidence of people they need to run a shadow government to make clear how it could do things better than London does. Then people might see the gains from voting Yes.
Will the SNP rise to that challenge? Time will tell.
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Callum Baird, Editor of The National
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