Backing Scotland’s Currency — Foreign exchange reserves for an Independent Scotland

Common Weal has published a new white paper, “Backing Scotland’s Currency — Foreign exchange reserves for an Independent Scotland”, authored by Peter Ryan. From the preface:

The successful management of an independent country’s currency is often tied to its ability to raise and maintain an adequate level of foreign currency reserves. These reserves would be used to stabilise the currency’s exchange rate, protect against speculative attacks on the currency and service debt obligations, amongst other uses. In the case of Scottish independence, it will be important to show that sufficient reserves can be established quickly enough after the launch of a new currency to ensure its stability. It is the purpose of this paper to demonstrate that this proposal is viable.

Ryan reckons that approximately $40 billion (20% of GDP) could be raised to support an independent Scottish currency. Denmark similarly holds in the region of 20% of GDP in foreign exchange reserves1. He estimates that the costs of servicing the debt would be around $70.2 million annually, which is “substantially less than the current annual contribution by Scotland to the UK’s foreign reserves (£500 million per year) which are being built up by the UK government to bail out the City of London in the event of another crash.”

From The National’s reporting of the paper:

Dr Jim Walker, chief economist of Asianomics, said while it was “absolutely correct” that an independent Scotland could raise $40bn in foreign reserves, it was also “absolutely unnecessary”. He described the Common Weal report as a “well-thought-out contribution”, but said many successful independent countries had levels of reserves considerably smaller than 20 per cent of GDP.

“The Czech Republic, until the last two years, had historically a substantial current account deficit making the currency much more vulnerable,” he said. “For Bulgaria that was also historically true but not in the last decade. However, these reserve levels [at 40 per cent GDP] are a result of past deficits. Scotland would run a large surplus.

“Two ‘small’ non-European players with open capital accounts and free-floating currencies, Australia and New Zealand, maintained reserves of 4.5 per cent of GDP and 10 per cent of GDP, respectively, for 2016.

“There is absolutely no need [for an independent Scotland] to be aiming at a 20 per cent of GDP reserve level.”

Peter Ryan’s previous paper, “How to make a Currency — A Practical Guide”, may also be of interest.

Tory campaign strategist Lynton Crosby pushed for Scottish independence vote before Brexit

Politics Home, 26 June:

Conservative election strategist Lynton Crosby urged Theresa May to hold a fresh Scottish independence referendum ahead of Brexit, it has been revealed.

“While it may seem sensible to delay a referendum until after Brexit negotiations are complete this is not necessarily the best strategic position to adopt,” he wrote [in a leaked memo].

“Holding a referendum on independence before Brexit is complete will mean that voters have to grapple with the uncertainty of the outcome of Brexit in addition to the uncertainty of their choice in the referendum.

“Delaying the referendum until after Brexit is complete removes one of these unknowns.”

He said a Brexit outcome that dissatisfied Scots could “easily result in Scotland voting for independence”.

Theresa May ditches manifesto pledges to clear decks for Brexit: Legislative battle ahead to clear hung Commons and Scottish Parliament

FT.com, today, in an article on the UK government’s legislative agenda announced in the Queen’s Speech:

There were growing fears in Whitehall that the Scottish nationalists could hold London to ransom by voting down the Great Repeal Bill—which puts EU law into British law.

Britain’s devolution settlement was developed under the auspices of the EU single market.

The government now believes that the relevant framework should be reset at a UK level, in particular for devolved policy areas such as agriculture, fisheries and environmental protection.

But that requires the authorisation of all the devolved administrations in Cardiff, Edinburgh and Belfast through “legislative consent motions”.

A Conservative official said that there was likely to be sabre-rattling by the SNP during the process, which could take eight weeks, but said there were hopes that Holyrood would not stand in the way. “It’s common sense. There would be major consequences for Scotland if this wasn’t passed, there would be holes in the law,” he said.

The Guardian’s Andrew Sparrow, earlier this evening:

This is a consequence of what is known as the Sewel convention, which says the Westminster parliament should not legislate on matters devolved to Scotland without the Scottish parliament’s approval.

As we learned earlier in the year, the Sewel convention is just that—a convention—and is not (as far as I believe) enforceable by the courts1. The UK Government, however, has thus far not (as far as I’m aware) overridden a vote in the Scottish Parliament. It seems that it could legally do so but in such a scenario we would be in uncharted constitutional waters.

Update: The Guardian has published an article looking in more detail at this issue. The piece includes quotes from Mike Russell, the Scottish Government’s Brexit minister, and Graham Matthews, president of the Law Society of Scotland.

Revealed: The plan to keep EU workers in Scotland

From this morning’s Herald:

Detailed plans have been drawn up for Scotland to set lower barriers than the rest of the UK for low-skilled immigrants after Brexit.

Experts at the University of Edinburgh believe they have devised with a “politically viable” way of sustaining the net inflows of EU workers currently propping up key industries such as tourism, hospitality and food processing.

The landmark report has been welcomed by the Scottish Government who described the current UK-wide approach to immigration as “damaging to Scotland’s economy”.

Business leaders fear the end to freedom of movement and hardline cuts to UK-wide immigration targets following Brexit will spark crippling labour shortages in Scotland.

You can read the paper—‘Scottish Immigration Policy After Brexit: Evaluating Options for a Differentiated Approach’—at the University of Edinburgh website. It looks at the merits of four main schemes1:

  • Human capital points-based systems, drawing on examples from Queensland (Australia) and Quebec (Canada)
  • Post-study work schemes, informed by the examples from Scotland and British Columbia (Canada)
  • Employer-led schemes, with examples from the Alberta (Canada), Switzerland, and the EU Blue Card
  • Occupational shortage lists, drawing on examples from the UK, Canterbury (New Zealand) and Spain

Scottish economy expected to grow between 0.9% and 1.3% in 2017

Dr Gary Gillespie, the Scottish Government’s Chief Economist, on the growth outlook for 20171:

Looking ahead, the outlook for growth in 2017 remains positive but at below trend growth.

There are emerging signs that confidence is returning to the oil and gas sector which, coupled with the structural improvements made by the industry since 2015, will put it on a stronger footing to take advantage of the opportunities which will emerge as cyclical factors improve.

The low value of Sterling is expected to support export led growth for the manufacturing sector, whilst continuing to rebalance the economy as rising import prices feed through to higher inflation, impacting real income growth and household consumption.

Brexit continues to present a significant risk to business and consumer sentiment in Scotland with investment sensitive to changing market signals. The range of independent forecasts for Scotland suggest growth of between 0.9% and 1.3% in 2017.

Said forecasts2:

Annual Output Growth Forecast (%) 2017 2018
Fraser of Allander Institute (Mar 2017) 1.2 1.3
EY ITEM Club (June 2017) 0.9 0.7
PWC (Mar 2017) 1.3 1.1

Unemployment in Scotland falls to 4%

Employment statistics for February to April 2017 were released this morning. They show a continued decline in unemployment in Scotland. The figure now sits at 4%, the lowest of the four UK countries1, a decrease of 0.6% on the previous quarter (Nov 2016 to Jan 2017), and down 1.8% year on year. The BBC notes that 4% “equals the figure recorded between March and May in 2008.” In fact, it’s the joint-lowest since records began in 1992.

Economically active (aged 16-64) Employment (aged 16-64) Unemployment (aged 16+) Economically inactive (aged 16-64)
Country Rate (change since Feb – Apr 2016) Rate (change since Feb – Apr 2016) Rate (change since Feb – Apr 2016) Rate (change since Feb – Apr 2016)
England 78.9% (+0.3) 75.2% (+0.6) 4.6% (-0.4) 21.1% (-0.3)
Wales 76.8% (+1.1) 72.9% (+1.0) 4.8% (+0.1) 23.2% (-1.1)
Scotland 77.3% (-0.4) 74.1% (+0.9) 4.0% (-1.8) 22.7% (+0.4)
Northern Ireland 72.8% (-1.4) 68.8% (-1.0) 5.4% (-0.3) 27.2% (+1.4)

Source: ONS dataset A01: Summary of labour market statistics (Table 22: Regional Labour Force Survey Summary). Further information: ONS June 2017 UK labour market bulletin.

Other notes from the ONS’s publication:

  • Of the 12 UK regions and nations, Scotland saw the second biggest increase in workforce jobs (56,000) between December 2016 and March 2017.
  • In March 2017 82.6% of jobs in Scotland were in the services industries. This compares to 91.9% in London and 77.9% in Wales.
  • For the period from January to December 2016, Scotland—along with the North East and North West of England—had the lowest average actual weekly hours worked in full-time jobs, at 36.9 hours. This compares to London’s 38.4 hours, the highest in the UK during 2016.

SNP took right-wing constituencies for granted and paid the highest price

Thought-provoking commentary by Michael Fry in The National today:

One thing that has struck me in all the commentary and analysis since the General Election is the refusal to accept that there might be a kind of right-of-centre Scottish nationalism, and that its alienation from the present leadership of the SNP could be a reason for the setbacks last Thursday.

… While Salmond was personally a lefty he could, as a former bank executive, walk the capitalist walk and talk the capitalist talk. That was what he and his colleague John Swinney did at a crucial stage more than a decade ago as they made the rounds of Scottish finance and industry persuading moneyed men that the independence of the country might be good for them too—and that, at any rate, things could hardly get worse than they eventually got under New Labour. All the while Salmond remained First Minister, he continued to cultivate these connections, and with a good deal of success. George Mathewson, Jim McColl, Brian Souter, Tom Farmer, Bill Samuel, Peter de Vink and many others have all endorsed or donated to his SNP. But since 2014 the ample flow of business funding has dried up.

The reasons are not far to seek, and can be found conveniently summarised in the election manifesto the SNP published a couple of weeks ago. Looking inside we find, against dozens of spending commitments and calls for higher taxation, only a couple of lines on how the private sector of the economy (from which all other blessings flow) is to be encouraged and expanded.

Fraser of Allander Institute publishes latest Scottish Labour Market Trends report

The Fraser of Allander Institute has today published its latest Scottish Labour Market Trends report.

Some excerpts from the report summary:

Despite apparently very little growth in the overall economy, Scotland’s labour market continues to hold up remarkably well.

Over the year to the 3-months January to March 2017, unemployment in Scotland fell 48,000 whilst employment levels rose 41,000.

The current rates of employment and unemployment are close to the best on record.

Levels of underemployment—that is people in work but who would prefer to work longer hours—have also fallen back towards pre-recession levels.

Scotland’s youth unemployment rate continues to outperform all other parts of the UK and compares favourably internationally.

…since the financial crisis there has been a rise in part-time employment (up around 9% since 2007). Within the part-time figures, there has been a 60% increase in the number of people who say the reason they are working part-time is that they cannot find a full-time job.

…nearly [three quarters] of the growth in Scottish employment over the last year was in the form of self-employment.

…there has been a further rise in economic inactivity—that is people not actively seeking work—of 15,000 over the last year.

In 2016, productivity as measured by output per hour worked in Scotland fell 1.5%.

Weak productivity levels will make it difficult for businesses to find new resources to support sustained wage increases.

The FAI also notes in its analysis that “the lack of growth in the wider economy—coupled with rising inflation—means that there is little prospect of a sustained improvement in people’s take-home pay.”

GVA growth forecasts for 2017 Q1 and Q2

Nowcasting Scotland, Fraser of Allander Institute, 6 June:

  • Our nowcast for GVA growth in 2017 Q1 is 0.22% which, at an annual rate, is 0.87%
  • Our nowcast for GVA growth in 2017 Q2 is 0.23% which, at an annual rate, is 0.94%

These results represent a downward revision relative to last month’s update [link]. In the context of weak economic performance over recent quarters, this suggests that there is little reason to be optimistic about the short-term performance of the Scottish economy.

Is Scotland on the brink of recession?

Fraser of Allander Institute, today:

On balance, it’s difficult to conclude anything other than the Scottish economy remains in a fragile position.

Whether or not it will be confirmed in July that we have entered recession is in the balance.

Given the way in which economies operate (and the statistical data is compiled), some form of bounce back is likely at some point. In the short-term, whilst not impossible, the balance of evidence suggest that this is unlikely.

But whatever the next set of GDP data tell us, what is key is the trend over the long-term.

Talk back in 2008 was for the potential of a lost decade of growth. Since 2006, output per head in Scotland has increased by just over 1% (that’s not an average growth rate, that’s the total increase).

With the new fiscal powers coming on stream this year, getting the economy growing again – and on a sustainable basis – will be vital not just for jobs and prosperity, but also our public services.