Fiscal sustainability is at the heart of SNP’s economic strategy

Stewart and the Scotonomics team didn’t agree on the economic fundamentals. This led to a challenging and engaging discussion.

William stated: “The Scottish population want to vote for an economy that’s different. And this is why I think if we focus too much on stability and talk about making sure that we’ve got the right foreign exchange policy. We’ve got, you know, reserves in place, and we’ve got the right people. I would like our government to say that we want to ensure that we’ve got full employment.

We finance a just transition, a green transition. We don’t focus on that: we don’t focus on growth. We make sure that the money in the economy is spread much more equally. And we do that without inflating the economy. That’s what we push everything towards. because that’s what I think people want from their economy.” William Thomson.

This is an excerpt from a conversation that tells us everything about the neoclassical economic understanding underpinning the SNP’s view of the economy. This was a keynote interview at the Scotonomics Festival of Economics in Dundee in March 2023.

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20 years in it 40 years in the SNP 18 years as a member of parliament the majority of that time doing the economic brief uh which kind of is why I’m here today do taxes pay for government spending at the UK level and what’s the difference between the relationship at

The Scottish government level with taxes well UK government spending is part tax yield part borrowing part issuing of uh interest bearing Bonds guilts in Scotland it’s part taxation it’s part Barnet formula that’s the block grant there’s very limited borrowing it’s around the margins basically to deal with the difference

Between forast tax yield an actual tax yield and when it comes to bond issuance there’s a real problem that um Transport for London has more power to issue bonds than the Scottish government and this question is really good as a starter for 10 because the imbalance or the asymmetry between devolved and reserved

Taxes and Powers kind of hits home with a simple question about Bond issuance which of course is a means of restricting Scotland’s ability to invest in the future what’s your definition of money it’s a means of exchange it’s a unit of accounting and essentially it’s a store of

Value okay um how is money created and the supplementary question to that is do banks loan out people’s deposits do the loan out people’s deposits is that how they make loans by loaning out people’s deposits most money not central bank money and not cash money but most money is actually created

By commercial Banks so when you borrow 10 grand from them when that £10,000 of electronic transaction hits your bank account it can then be converted into real cash or it can be used to buy things in the real economy so most money paradoxically is created when a Commercial Bank lends you something do

Banks lend out deposits they can or the deposits can be used for the formation of capital they can be used as part of their central bank reserve um so in essence no they don’t take in £1,000 of deposits and land out £100,000 they can do lots of things with

That money and then because of fractional Reserve Banking and a requirement for 10% to one Capital you know if they’re takeing £100,000 they can land out a million in essence yeah there’s no direct correlation between the money that the bank has in its Vault to what it can lend out because it lends

Out to People based on the banks um they think that the bank thinks that the person is going to be able to repay that loan and that’s why they loan the money there’s no direct relationship to the amount of money that people have in deposits no that’s correct the

Limitation on what a bank can lend is in essence determined by the amount of capital which they hold uh and that is a good model particularly if the capital levels are sufficiently high because that then stops an IL should stop an illiquidity problem becoming an insolvency problem unless of course there’s a catastrophic

Run on the bank at which point the game’s up in any event okay great and how is the interest rate set in the UK the base rate is set by the monetary policy Committee of the bank of England uh independently uh it’s not set by the market it’s set by the

MPC okay and is the UK government like a household a simple yes or no for this one and do you believe that government should balance their books in the short medium or long term so first one first no they’re not like a household okay should they balance the books short

Medium long time right let’s split this into Revenue spending and capital spending as a traditional kinyan Orthodox might say it makes no sense for a government to be running up a debt on its current account when growth is high or above Trend by the same token it’s absolutely essential

That they run up a deficit on their current account with low growth or negative growth for no other reason then the automatic stabilizers must kick in the money to pay unemployment benefit housing benefit mortgage support simply must be there when you come to Capital it’s a slightly different

Question there’s an argument for Capital spending for investment to go on regardless and we’re actually seeing an example of where that’s not happening now in the budget from two weeks ago government investment is negative or it’s a negative component to GDP growth for 2025 26 and 27 that’s a drag on GDP

Growth for the bulk of the forecast period which which means it’s contributing to below historic Trend growth at a time when it needed and we saw this actually more stly in 2010 where the UK along with Argentina were the only two countries to fully withdraw fiscal stimulus after the

Banking crisis and many many economists have suggested since that part of the reason for the sluggish growth over the last decade and a bit was as a result of withdrawing the fiscal stimulus fully into 2010 so Revenue spending probably over an economic cycle if it’s balanced there’s lots of

Versions of this capital investment we need to be much more careful that we’re not removing productivity growth and economic gains in the future by withdrawing Capital spending too soon um I want to know what your thoughts are on this Rec UK budget well the budget is in a number of

Parts you’ve got the obr assessment of where the government will be H against its own targets so two Targets one’s a debt Target one’s a borrowing Target they are forecast to hit them both in 5 years time although the margin for error in the debt target has gone from 0.3% of GDP

About 9 billion quid to 0.2% of GDP about 6 billion quid in 5 years time the borrowing metrics are slightly better but nevertheless what the obr tell us is if the governments stick to the plan they’ve set they will only just meet the targets they put in place less than a year ago

Secondly uh it tells us what all the metrics look like for the forecast period uh so the government investment Target it’s negative for the bulk of it and drag on growth um GDP growth itself pretty taid employment Rises a bit and bobbles along somewhere around 33 million people

But clearly doesn’t do enough to actually end the labor shortages in the economy generally and the skills shortages in particular sectors so it tells us a pretty average tale of a pretty average economy and then the third bit of the budget and we’ll see this this week with the finance bill is

The actual specific measures which they’re intending to do now when you look at this list of measures however many there are 100 odd you know they’re all to do with the um the rate you start paying tax at and this measure and that measure it’s all pretty

Tame stuff there are only two measures which we voted against this week there was only one labor voted against it was the end to the cap the lifetime pensions cap uh for pension saving for very wealthy people you know we can understand why they’re doing this but it

Makes no sense and it’s dreadfully unfair the other thing was the 10% plus Duty increase in Scotch whiskey uh again you know there’s a reason to increase a DE increase the price of alcohol but to have decreases on certain beer products when you’ve got a 10% hike in in Scotch

Whiskey that looked to me like they saw a cash cow rather than them making a rational economic decision so we’ll get into the detail of this this coming week second reading of this bill and then we’ll see what follows thereafter when you said the uh government isn’t like a household do

You kind of agree with the mmt position that the government spends all money into the economy I’ll just repeat that question for the online audience do you believe that government spends and then taxes so effectively taxes don’t don’t account for any government spending they’re simply a way of of deleting

Currency out of the economy or do you think that taxes for the UK as a monetary Sovereign actually pay for services because whether theone is borrowed and the tax yield then pays off that debt or whether the tax yield comes in and then it’s spent on the services is actually

Irrelevant the fact is that the tax component does fund whether it’s in or in advance does fund a proportion of the spending the remainder is built up as I say from borrowing or from issuing debt and um so in a sense it doesn’t really matter uh I’m intrigued by the idea

Though that how the money is created determines whether what it’s spent on is good or bad I think if we spend money building a new hospital it’s a good thing I think if we spend money building a nuclear weapon it’s probably a bad thing whether that’s central bank money that someone

Created with a computer or the tax that you work very hard to pay is frankly inconsequential there was no mention of the much heralded Edinburgh reforms yes I I I was will we just summarize what those are the Edinburgh reforms yeah yeah yeah okay so um our

New Chancellor in December said that the banks need there’s too much regulation in our financial services system and we need to deregulate again and here’s how we do it and I I’m not sure why it was said in Edinburgh and it’s called the Edinburgh forms but that’s what it’s

Called it was passing reference to it and this may come up in a subsequent question the banking system is important it’s extremely important to the UK government and if they think they can get economic growth off the back of it they will try to do it the reason that

There’s nothing specific at the moment is you’ll be aware there were I think dozens of consultations covering lots of different aspects of banking regulation uh and banking operation Financial Services regulation and operation most of those haven’t concluded yet when they conclude and the government report then there’ll be a

Series presumably of Law and Regulatory changes which are brought forward at that point we’ll know exactly what we’re dealing with I suspect though given the collapse of uh svb and Signature Bank and the difficulty credit SS got into and uh Rising recollection or awareness of what happens when you under

Regulate or indeed when you have too much cheap money combined with under regulation I I suspect this might be considered for a little longer than the government might otherwise have done so my next question is what do you think about the UK economy what do you

Think makes it tick and what do you think is unique about it good or bad in comparison to similar sized economies it is good and B uh it has some fantastic Advanced engineering but not as good as Germany it’s not unproductive but it’s not as productive as France it’s got

Regional imbalance it’s also got Regional strength you think about Scotland’s food and drink offer for example a bioscience he here and the satellite sector here so there’s a whole bunch of things which are good and bad it also has a really good fundamental basis interestingly it has the rule of

Law and it’s got pretty much an uncorrupted tax system we might take this for granted there are other parts of the world where you can’t take that for granted there are also labor rights which are still enshrined in law however much stories might want to push back on

Them and there’s also the city of London I when I say the city of London I don’t mean a single institution I mean what is a very deep and very liquid Capital Market uh absolutely essential the Tories want to milk that I can understand why it has the potential to

Be a force for good and and to fund all sorts of Enterprises so there’s a mix of things the city of London I would say for the UK government is one of the Keystone parts of it but there may also be subsequent questions about what the consequences of that being so London

Centric are and I’ll happily answer those when they come yeah that was that was my next question so can you elaborate more on the issues with it being so London Centric and the issues with having this overly sized financial sector as well what are the issues with

That to well this answer might not be the one some people expect but to me the biggest Consequence the downside of closing down all the regional stock exchanges wasn’t just a Building closed or an institution ended the ecology around it of Brokers and Traders and dealers and market makers and back

Office people who all had the vocabulary of profit and loss and balance sheets and forecast and return on investment and return on equity and value per all of this stuff who had the language and vocabulary of a prospectus has vanished and so you now meet hundreds thousands of incredibly

Ambitious talented people with great ideas they might have some savings they might take a soft loan from fr or family they might ask a bank for money I cannot remember in a decade a single young person saying to me I’m putting together a prospectus to go to the market to

Raise capital for my business and I think the problem with this being so London Centric is the expertise the ecology and the vocabulary around access to Capital has narrow to the point that real people think you just go to a Commercial Bank and even the understanding that you can go somewhere

Else to raise large amounts of money for a good idea has disappeared and I think what the UK government has done by centralizing this is actually stifled economic activity in these islands yeah absolutely so you you make it clear that you know this has lost its subsidiarity um and ER but what about

Regulations Che more less regulation what do you think let’s go back to before the financial crash just for a moment we had a tripartite regulation frame regulatory framework Central Bank treasury regulator wasn’t fit for purpose regular regulatory overlap underlap stress testing I suspect was non-existent Capital ratios if they were

Even spoken about goodness knows what there was vague talk occasionally of moral hazard but when the reality struck the conduct of business risk could morph into systemic risk that when liquidity risk could morph into solvency risk when the reality struck that a small Mortgage Bank could be delivering

Contagion around the world through 100 different distribution channels everything changed microed dential regulator looking at businesses a macr prenti regulator if you like in the FPC looking at systemic risk on the whole thing an independent interest base rate setting body a conduct of business regulator because we now know how important that

Is regular stress tests much higher capital much higher again for systemically important financial institutions absolutely vital do we need more do we need less my judgment is we’ve probably just about got it right we didn’t even have in 20089 a resolution mechanism in law to deal with a failing bank nobody ever

Spoke about shareholders then Bond holders being wiped out to protect depositors that’s now spoken about would I like to see that Unwound no I would not does it need to be strengthened make it case and I’ll back it I think we’ve probably got it just about right in

Terms of the things which are regulated and supervised in a way that simply wasn’t there more than a decade ago and what about the UK economy do you think that it needs to keep growing for the UK to be successful and how do you place that in in a planet with finite resources

Okay yes it needs to keep growing the problem is when we talk about that we’re normally talking about GDP because that’s the the measure we use for international comparison GDP hides a multitude of Cs like we all know the old adage if there’s an oil

Spill the 20 million quit to clean up is added to GDP even though it’s utterly unproductive right but excluding the issue of GDP because there are other measures yes it probably needs to grow but surely to goodness we can collectively find a way to grow economies which is sustainable in a way

That hasn’t necessarily been the case up until now that’s question to your colle Shan yeah um in regards to reframing uh kind of fcal Target uh last year the you the SNP YSI they universally backed a motion uh to ditch kind of fiscal de defic and ratio

Targets to support it was when you followed something that of George Osborne who reduced the UK deficit uh to 2.8% that came a massive both economic and social cost uh in regards to health and in regards to econic activity within the economy and in regards to this social well-being uh and what their

Argument was to replace as part of the motion was instead of doing ratio targets uh instead the Scottish Central Bank after Independence should focus on an inflation Target so uh civil servant at the central bank would report back to the Scottish government and the Scottish Parliament and show what happens if you

Spend x amount in each sector rather than ratio targets if that motion went to S&P conference would you support that motion and if so why if not so this is just should we have um fiscal targets that that that that are relate to our debt to GDP ratio that’s for the online

Audience at some the targets I would like to see and I’ll explain why if anyone cares to ask later that the targets I would like to see are around stability I think the inflation Target is actually quite a good one in that regard in terms of ratio targets if you’re allowing your

Automatic stabilizers to function you’re spending when you need to when there’s a downturn you’re spending to invest in capital to get the growth in the future all the time but you’re not running a deficit when you’ve above trend growth you know that’s not a bad set of

Targets but I think on balance on balance I would probably say stability and an inflation Target does make sense and the reason I’m so keen on stability is when we launch finally our Central Bank and currency plans getting those plans right will be the most important thing we can

Do to determine the credibility of the entire Independence project so if the target was for example if the Mandate was a 2% or a 2 and a half% inflation Target some stability measure maybe a secondary Target for growth this is all up for discussion you there’ be a package of

Measures there but by God have they got to be Absolut absolutely credible we saw what happened with quasi Quang indulged in some you know extreme rightwing experimental puon Street Think Tank economics you know 74 billion later in 5 weeks him and the plan were both out of

A job we cannot afford to take that risk with real people’s money and we can’t afford to take that risk with our credibility and The credibility of the overall Independence plan can you explain what you mean by um um sustainable or or or um stability what what do you mean by that because

That obviously has an impact on what you’re spending and what you’re doing in an economy so if you’re going out and saying stability means we are not borrowing enough or or or we’re not borrowing a certain amount or we’re not spending a certain amount that has a direct and measurable impact on society

So can you explain what you mean by that term well if you are forecast to spend x amount of money and it’s within your forecast inflation Target and it’s within your forecast economic growth Target that’s perfectly sustainable if and I’ll add this as an addendum if you’re spending on the right

Things that’s to say green growth and education as opposed to certain bad things are not really necessary then you can have any measure of sustainability but we all know what it is when we see it yeah but forgive me I’m not the sharpest pencil in the Box

On all the economics here um s I’m hearing you sort of that when you’re talking specifically about the Scottish government’s um offer if you like about what the shape of you know independent Scotland would look like it’s kind of Outlook it’s banking it’s you know Reserve Banks whatever um I’m hearing

Hesitant written all over that and kind of like you because you’re saying it’s such a big decision we’ve got to get it right but not nobody saying hey get it wrong why don’t you right but that’s usually a a kind of precursor to delay or to what what is it

That you’re waiting for no it’s not a precursor for delay at all uh once we are in the position to know start planning in advance when or the me mechanism by which we’ll become independent and the likely time scale will become independent then we have a number of tasks we must

Do we must establish a central bank a debt management office much much much more robust financial reporting and economic stance we must have the correct reg Regulators covering the microed dential and the conduct of business and the credential we must be recruiting the right people from around the world so

We’ve got the best and most credible people heading up these institutions we need to put in place the mechanics by which we will build up our foreign currency reserves and all of these things we must agree government must agree Parliament must agree what will the Mandate for our Central Bank

Actually be written down in black and white that’s absolutely I’m sorry I’m just we don’t have I understand all those you know components you’ve described them they have been described so we know that what is it you’re waiting for to know kind of for example what the shape of the central bike might

Be whether it’s going to be a dependent um you know there sort of key factors in it what what what do you need to know what more do you need to know before you can lay out your plan no I don’t think there’s very much more we need to know

Other than other than other than the timing and making sure that what we do is absolutely credible with the right people leading it and everything you’re saying I don’t think anyone would disagree with but it doesn’t sound very inspiring to a a a a population who want

To vote for an economy that’s different and this is why I think if we focus too much on stability and talk about making sure that we’ve got the right foreign exchange policy and we’ve got you know we’ve got reserves in place and we’ve got the right people I would like an

Economy and I would like our government to see that we want to ensure that we’ve got full employment we finance a just transition a green transition we don’t focus on we don’t focus on growth we make sure that the money that’s in the economy spread much more equally and we

Do that without inflating the economy and that’s what we push everything towards because that’s what I think people want from their economy if you’re selling an economy to people that’s what you should be talking about I think stability I don’t really think many people are going to get excited about

That does the market want stability of course it does because what comes with stability guaranteed profits so I think we’ve got to be really careful about the message that we’re we’re we’re putting out so I know that’s one of the challenging things we wanted to disc so

How how do you feel about that difference in messaging all right let’s just uh pick up one of the latter points here I don’t think the market does like stability I think Capital capitalism loves chaos they make a profit out of me I don’t want to give them the

Opportunity to profit out may have absolutely not in terms of the targets you or the objectives you set full employment adjust transition 100% I don’t think anyone would be in disagreement with that but here’s the rub we can be as excited we like about the opportunities but when George Osborne in

2014 kept asking what currency will you use it wasn’t because we didn’t have a currency plan we actually had a brilliant currency plan for 2014 the reason he asked what currency will you use is it then put a question mark over every single other aspect of the financial Arrangements of the

Independence plan so this time whatever it is we do hasn’t just got to be technically correct it’s got to be politically bombproof there can be no Union is vetal but we must counter what they’re going to do which is Project here too they will s doubt on every

Aspect of the economic plan by sewing doubt over the currency plan so if I sound like a boring Banker talking about a stability mandate and making sure the central bank has the correct level of reserves to making sure the stats are right to making sure that all the regulatory framework is absolutely in

Place if that sounds really dull and uninspiring then frankly I will have done my job because it takes away the trump card they have got to undermine all of the economic components of the independence plan but you’re focusing on that and not inspiring uh people in an

Economy who want we all we’re all here because we see there’s something wrong with the economy and you know as you said moving figures up and down doesn’t monumentally change anything we need to do something drastically different and we I think we have to sell that not just

To the independence movement but to everyone in Scotland that we can do this differently and that I don’t think has a big impact on people and there in I think is the answer to your question it might not sound inspiring but it will be very comforting to know your pension is

Actually safe it might not sound very inspiring but it’ll be very comforting to know your savings won’t be eroded by inflation it might not be very inspiring but it’ll great to know that the order you’ve placed overseas or the order you’ve made to fulfill overseas will be paid at a

Price you’ve agreed and that will not be eroded By changes in the exchange rate there’s a version of this story which actually puts a lot of Minds at rest and brings those soft NOS soft yeses to us because we’re serious about the job we’ve got to do we’re not just getting

Really excited in a room with independent supporters but we’re talking the language of real people who want security for themselves their businesses their families the future their savings their that’s where we need to be found it very helpful to to actually separate the issue of currency into into two

Things because uh does the political aspects in a election or whatever it’s going to be and then two or three years later after the end of the transition period when you get your actual Independence Day there what’s actually going to happen and they’re quite different and what actually happens

Doesn’t necessarily need to follow a plan that was produced three years ago because circumstances might change but you know maybe you can you can comment I think in the Scottish currency group that U the only thing that works politically in a referendum or election campaign is to Simply say that Scotland

Will have its own currency as soon as practicable after Independence day having used the transition periods to make all the necessary arrangements to give that future government the opportunity to introduce the currency at the timing that it determined and we don’t want you know all the stuff in the

White paper about following European um you know the no growth and instability pack rules and uh fiscal you know ratios and all that needs to go in the bin uh and anything you know mentions of U just using Sterling also should go in the bucket uh and just leave it as a nice

Simple thing which cannot be challenged can we just can we just yeah so can we just simplify things and say we’re going to do what we’re going to do is that not enough stability for people do we need to be so discriptive considering we don’t really know what’s going to happen

Um the first bit I agreed with entirely uh we will move to an independent Scottish currency as quick as it is economically viable to do so or a version of I’m perfectly relaxed about that the problem with the second part of the formulation is yeah but how what level

Of current foreign currency reserves will we have what will the regulatory framework look like I don’t think we can run away from some of those difficult questions now it may be that there are bits of the current formulation that we can put in the bin you might be

Absolutely right but I don’t think we can hide from some of those legitimately difficult questions and part of the time we will spend between now and hopefully a very short time in the future will be to determine the answers to those questions the public particularly those who want independence aren’t sure they

Deserve an answer qu quen and that idea of stability so obviously when Gordon Brown was in power he made the the Central Bank Independent you know I to say that in inverted commer um and their independence meant perhaps that they actually caused more or less a coup do

You think that’s really what happened there and you know handing that control over to the central bank that that is a two headed problem it certainly was not a coup uh the economy was collapsing at a rate of Nots particularly the pensions industry a rate of knots uh I think what it did

Demonstrate is when you have fiscal policy and monetary policy working against each other it’s not a very happy place to be so to have quite extraordinary fiscal loosening from the chancellor and monetary tightening from the Central Bank simultaneously was just Madness someone made money but it wasn’t the public I

Mean that’s just absolute Madness what I think was instructive is the first thing that Jeremy Hunt did was to affect effectively unwind almost the entirety of the fiscal loosening uh that was experimental rightwing student politics and he should never have had his hands on the levers of anything approaching economic

Power okay and yeah I was just going to ask you said it’s got to be credible who deter it credibility well here’s the thing if we write it collectively if we agree it collect ively we can defend it collectively who determines when it’s credible well our opponents are going to

Say it’s not no matter what you write the public will determine whether it’s credible and when we’re sitting down with a blank sheet of paper and a pen each and every one of us will come up with a plan which we think can be cogent which we think we can communicate to the

Public which we think actually makes sense economically but the public will determine the credibility of the plan not us really and not our political it sound to me like only people that you know from the impression I got that would say credible not financial industry I’m going to ask that question

To the audience because I realized earlier I was trying I was speaking on your behalf and I might have been completely talking nonsense right so I’m going to give you an opportunity to vote we’ve got two we’ve got two prospectuses to to to the Scottish population not just independent sporters but we’re

Going with this financial credible stability or we’re going with this kind of picture and image and Imagination for a different economy and can I just have a vote for who’s in favor of the stability CR credibility message for an independence campaign okay okay and the image for a very

Different and much better and fantastic amazing economy okay so we’re about 50/50 there for your for your engagement I hope you’ve enjoyed that thanks very much thank [Applause] You