GEORGE Kerevan is certainly correct in his main argument that the Tories are itching to get back to austerity (Johnson is lying when he says no austerity over the decade to come, June 29). Unfortunately, though, George also seems to accept some of the false neo-liberal tropes we have been conditioned to believe since the Milton Friedman/Reagan/Thatcher period.

Firstly, there will be a very large deficit this year, but that is not a problem for a currency-issuing government. It is not being financed by the market at all, as 100% of the “borrowing” incurred between March and June has been from the Bank of England and the interest rate on the one-third of the so-called national debt that is owned by the Bank is 0%. Issuing gilts and having the Bank buy them is a policy choice and not in fact necessary. The Treasury could instead use its overdraft facility on the Ways and Means account. That also avoids paying commissions to city dealers.

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Secondly, the interest rate on the two-thirds of the national debt that is in private hands is at an all-time low. Despite the relatively large size of the debt, the total interest bill for the year is low, and in terms of GDP it is only a quarter of what we were paying in the 1950s. The current interest charge is easily affordable and the annual interest bill is currently falling as older higher-interest gilts are retired. The Tories may well impose tax increases but there is no economic need to do so, and indeed tax increases would sabotage the recovery from the virus by reducing demand even further (though there is considerable scope to shift the tax burden onto the high-income/wealth sector).

Thirdly, I agree that increased state spending is not guaranteed to assist the recovery, but it is most certainly necessary. It does absolutely matter what the state spends money on, but I would largely disagree with the comments on capital spending. We should use the virus recovery as the ideal time to adopt the Green New Deal. That means things like electrifying all the railways, insulation for 30 million or so houses and workplaces, and 100% renewable energy. There should also be a large council house building programme. Those are things that do have large multipliers, and most of the materials can be sourced from Scotland. The money is not going to be spent in Primark or on German goods if the projects are properly structured. At the Scotland level we should be thinking of a £10 billion per annum investment.

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If the Scottish National Investment Bank (SNIB) were a proper bank then it could work the same way as any bank, ie it creates the money it lends out of thin air. The German equivalent state-owned KfW Bank created €800 billion to fund the Covid bail-out scheme for German firms. It was not borrowed by issuing bonds and nor did it come from the government. Every time a bank splits a debit and credit it creates money. German firms now have €800bn and KfW has an asset of €800bn of loan agreements. The SNIB could do exactly the same – other than a small capital reserve it could create billions to lend to Scottish business with no need to borrow them from anywhere. The “loanable funds” theory is simply wrong.

George is correct that the Scottish Government should be wary about taking on large loans. That is because we are not independent and do not yet have our own currency. So we would stimulate and improve the Scottish economy but most of the extra tax receipts generated will go to London. The Scottish Government will not get the return it should get that would allow the interest and capital to be repaid, so would suffer a gradually rising funding squeeze. There are exceptions – councils could issue bonds, which they are allowed to do, and build council houses. The rental income should more than cover the repayments and interest rates below 2% could be locked in for 30 years.

Tim Rideout
Scottish Currency Group