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.

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.

Initial data for 2016 imports and exports published

The latest Quarterly National Accounts Scotland (QNAS) release include data on Scotland’s onshore imports and exports for 2016.

Source: QNAS 2016 Q4—Summary Tables (Table G).

These initial data show that in 2016 Scotland exported £46.6 billion (63.7%) of goods and services to rUK. As a percentage, this is down very slightly from 64% in 2015, but is subject to future revisions. The statistics also show that 61.7% (£51.3 billion) of Scotland’s imports came from the rest of the UK (up slightly from 61.1% in 2015). (We won’t know how much rUK exported to Scotland in percentage terms until the new Pink Book is published in October.)

Some caution should be exercised with regard to these initial figures for imports from rUK. The government’s bulletin notes that they “rely on statistical modelling and supply & use balancing to produce results. For this reason, results are liable to frequent revisions until they have been subject to a full annual supply and use balancing process.”1.


The below chart gives a fuller picture of Scotland’s trading position, showing how much is imported and exported to and from both rUK and the rest of the world. In 2016 Scotland had an overall trade deficit of almost £10 billion. Scottish Government analysis shows that the increasing value of imports caused the widening of the onshore net trade deficit. This ultimately had a negative effect on GDP growth2.

Source: QNAS 2016 Q4—Summary Tables (Table G).

Full details of 2016 exports are expected to the published in January 2018.


‘Gravity’ relationships in trade

Pro-Union advocates highlight Scotland’s reliance on the rUK export market to argue against independence. However, it’s perfectly possible for a country to do significant trade with its nearest neighbour. For example, in 2015 Canada exported 77% of goods and 55% of services to the USA3. By comparison, Scotland exported 55% of goods and 71% of services to rUK. Or to look at it another way, 55% of Scotland’s exports to rUK are in services (27% of which are in financial and insurance services); 45% in goods4. This exposes Scotland to risk, whether independent or not—but arguably more so under independence, at least early on and until any diversification of trading partners takes place. A good agreement between rUK and Scotland on the basis of legacy arrangements would lessen the likelihood of problems, e.g. with financial regulation.

Scotland’s reliance on the rUK market can be partly explained by considering the so-called ‘gravity’ relationships between trading partners. Keith Head and Thierry Mayar noted in a 2013 research paper that “exports rise proportionately with the economic size of the destination and imports rise in proportion to the size of the origin economy.”5 This statement reflects the data on Scotland’s trading relationship with rUK.

To use another country as illustration, the diagram below shows how in 2006 Japan exported more to the larger economies of the EU, and less to the smaller ones. Also, the larger the economy, the more Japan imported from it.

Source: Head and Mayar, Gravity Equations: Workhorse, Toolkit, and Cookbook (2013), page 7.

The diagram below show how distance is also a factor in how much trade occurs between countries: in 2006 France exported more to, and imported more from, countries that were closer.

Source: Head and Mayar, Gravity Equations: Workhorse, Toolkit, and Cookbook (2013), page 7.

Considering these factors, and Scotland’s long history and shared currency with rUK, it’s little surprise that Scotland exports 64% of goods and services to and imports 62% from rUK6.

(North Sea oil and gas are not included in Scotland’s trade figures because of the difficulty in calculating the figures7. However, some recent experimental statistics have been published.)

Immigration and the UK Economy

Professor Jonathan Wadsworth, senior research fellow at the Centre for Economic Performance, LSE—Immigration and the UK Economy, published today:

  • Much of the recent falls in net immigration are driven either by a rise in emigration or a fall in the number of Britons returning to the UK—things over which the government has very little control.
  • Immigrants do not take most new jobs. The immigrant share in new jobs is—and always has been—broadly the same as the share of immigrants in the working age population.
  • Areas of the UK with large increases in total or EU immigration have not experienced greater falls in either jobs or pay of UK-born workers. The big falls in wages observed after 2008 are more closely associated with the fallout from the global financial crisis than immigration.
  • There is little effect of immigration on inequality and the relative pay and job prospects of less skilled UK workers. Changes in wages and joblessness for less educated UK-born workers show little association with changes in immigration.
  • Immigrants pay more in taxes than they take out in welfare and use of public services. UK-born individuals, on average, take out more in welfare and benefits than they pay in taxes. So immigrants help to reduce the budget deficit. There is little evidence that immigrants have negative effects on crime, education, health or social housing.

On productivity and GDP growth:

Migration acts much like trade in capital, as people tend to move to countries where they can be more productive and earn higher incomes. This increases welfare through greater efficiency in labour allocation across the world. Immigrants also fill the gaps in the skill composition of the national workforce. This fosters specialisation, increases productivity and raises the wages of national workers with complementary skills.

Recent work by Boubtane et al (2015, Table 3) finds that a 50% decrease in the net immigration rate would reduce UK productivity growth by 0.32% per annum. Since EU immigration is half of the current UK total … cutting EU immigrants to 80,000 per year is likely to shave 0.16% off productivity growth. So about a decade after Brexit, UK GDP per capita will be about 1.6% lower than it would have otherwise been.