THIS is a further article showing how an independent Scottish Government with currency-issuing powers and a central bank will have policy options simply not available to the present devolved Scottish Government, which is required to use sterling controlled by the Bank of England.
Scotland will run a large deficit for the first decade after independence as we seek to bring about a rapid transformation of our economy in order to create a fairer, greener society and a wellbeing economy.
There are very clear priorities in those early years, including:
- Establishing a Scottish civil service;
- Rebuilding the NHS and the public health system;
- Establishing a social care service;
- Improvements to our education system including occupational re-training and re-skilling;
- Improving welfare and pension provision;
- Investments in decarbonisation and energy efficiency;
- Infrastructure investment, including a nationwide social housing programme.
READ MORE: No need for government spending to be ‘burden’ on future generations
These priorities will require a significant re-allocation of resources and a high level of public investment in the form of government spending. As a result, we are likely to experience low levels of unemployment and a large fiscal deficit.
Many economists and politicians tell us we should worry about deficits and government debt but this is not true, provided government spending meets two key conditions.
The first is that the spending creates high-value assets in the economy. This outcome means that on the nation’s balance sheet the deficit is matched by valuable assets. The second condition is that the spending employs available resources efficiently and effectively to deliver the intended policy outcome.
What do we mean by “high-value assets”?
The most important asset we have is our people, their skills and knowledge and their capacity to work. Government spending on health and education has the objective of creating a healthy and productive population capable of producing all the things we need to thrive individually and collectively.
Investment in energy efficiency, infrastructure and decarbonisation will create high-value physical assets which will provide energy security, reduce energy costs and assist in the transition to a zero-carbon economy.
Public investment in research and development will support long-term improvements in productivity and the new technologies needed to help us live well while respecting the environment and using our natural resources responsibly.
When government spends on employing people in public services such as the NHS and education, the workers then spend their earnings on goods services, resulting in circulation of money in other parts of the economy.
Government also spends money on contracts with private-sector firms and these firms and their workers then spend that money.
Inflation can occur if the money circulating in the economy is increased further when the government continues to spend at a time when the available resources are fully used up. To manage this situation, governments have two main “policy levers” – fiscal policy, which is about managing the balance between spending and taxation, and monetary policy which sets interest rates and can be used to encourage saving rather than spending.
Taxes remove money from circulation. They can be designed to disincentivise certain kinds of spending and/or reduce spending levels overall. Taxes are not required to pay for government spending – with our own currency and central bank government spending decisions are financed by the central bank.
READ MORE: Here are the key essentials for creating a different Scotland
It is standard practice for governments to issue bonds – usually referred to as “government borrowing” – but these do not pay for public spending. Bonds take money out of circulation and are a means for investors such as pension funds to save and earn interest. When governments run a fiscal deficit they normally issue bonds to the same value but this is not really necessary – it has just become standard practice.
While Scotland is embarked on a rapid transformation of the economy, tax and incentivisation of savings will provide the key means of managing the circulation of money in the economy and allowing large amounts of public investment while controlling the risks of inflation that may arise when resources are being fully employed.
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