money

The Issue

we struggle to invest in good public services

From roads to schools, hospitals to the police, the public services and infrastructure of a modern democratic welfare state are the foundations on which the rest of that society is built. But more and more we seem to struggle to pay for public services that we think are fit for purpose. Our budgeting cycles are far too fast and our long-term financial planning is poor. We raise tax from a shrinking tax base where the richest hoard enormous amounts of wealth and are able to avoid paying their fair share of tax on it while a giant section of the public is so low-paid it pays little or no tax at all, leaving the bulk of the tax we raise to be collected from a shrinking group in the middle. It is highly inefficient and raises comparatively little money for the tax rates it requires. This is a problem not with public services or with tax but with inequality.

Why is our tax so easy for the wealthy to avoid? Because our tax system is inordinately complex and riddled with what are deliberate loopholes and generous perks which have been placed there as a result of lobbying by the wealthy. The more complicated a tax system is, the easier it is to manipulate and the harder it is for the rest of us to see that this is happening.

None of this is to say that there aren’t problems with public services which have mostly become top-heavy with management and consultants who absorb more and more of the money they spend, restricting funding to the front line. These managers and consultants manage public services via targets and performance indicators, and that requires large administrative burdens to be placed on frontline staff - where they should be providing services they are instead filling in paperwork for managers to manage.

On top of all of this we are stuck in a failure loop. Our society is making us sick, is harming our mental health, is making housing unaffordable, is increasing environmental damage and much more. We spend ever-more of our public resources trying to solve these ever-increasing problems. So long as we are trapped in that failure loop we’ll never have the public services we deserve at the tax rates that should be enough to finance them.

The Alternative

Sensible tax rates in a more equal society that doesn’t fail so much

The alternative is simple; reverse each of these problems. A more equal income spread which generates much more tax income from the same tax rates. A simpler tax system in which it is very hard to avoid paying your fair share. ‘Frontline first’ public services run by professionals and not professional managers. A society which is not generating ever-bigger problems to solve as its economy does more and more damage to our citizens and our environment.

Common Weal is unconvinced this can be achieved through devolution. While the Scottish Parliament has many powers it can use in many areas, its powers over tax and money are very severely limited and it has no power at all over some of the big monetary and fiscal policies it would take to tackle this problem properly; the Scottish Parliament can barely even borrow money. We therefore believe that seriously solving this problem will require Scottish independence. This brings new challenges like bedding in a new currency and developing a medium-term monetary strategy. But we believe that is the best chance Scotland has for sustainable public services and manageable tax rates.

The Solution

A new fiscal and monetary strategy

If Scotland was to become independent it should create a strategy for increasing economic equality, creating stable, long-term financial plans which help us to break failure cycles. This needs us to bed in a currency, rapidly transform our economy and create a public investment framework which will support public services.

The To Do List

  • A common perception of ‘public finance’ is that first you raise tax and then you spend it. But this just isn’t how public finance works. This will be explained in the next chapter. For now, let’s focus on the fact that Scotland as a new independent country needs to invest in development and that investment should be strategically driven. For that reason, public finance (the allocation of public money to public services and infrastructure) should be separate from tax and monetary policy (the way the money system is managed and how income for public finances is generated). First a government must set out its aims, goals and vision for what it wants to achieve over a full parliamentary term. Long-term budgeting is important. Annual adjustments to changing circumstances are inevitable, but good government requires

    those delivering services to be guided by robust plans. Once the goals of government are set, a Department of Investment would negotiate with all departments delivering the national agenda to gather their views on the short-, medium- and long-term realities of the costs of that delivery. The Department for Investment would negotiate with all departments, challenge them to demonstrate why exactly each area of investment is needed, ask if there are alternative ways to deliver the same outcomes, and what would be lost or impossible to achieve if that investment were not provided.

    Creating a ‘map’ of priorities and actions would guide the Department of Investment to make decisions about where it thinks trade-offs are necessary. An independent Office of the Auditor General (a public ‘watchdog’ to monitor all public spending) could then use this information and the evidence on which it is based to produce an open access Public Investment Options Report. This means that, before spending decisions are made, the public, as well as the Civic Forum and the Citizens’ Assembly, are fully informed. So if a government is warned that reducing funding to a public service will lead to detrimental impact but decides to go ahead anyway the public will be fully aware at the time the decision is made not years later when the service deteriorates. This map would also enable the Scottish Parliament to have more informed and forensic discussion of the budgeting process.

    Once it has the Options Report the Department of Investment can make decisions about trade-offs and compromises but must do so through negotiation with the Department for Tax and Money which is responsible for taxation and monetary policy. This is discussed in detail in the next chapter, but the Department for Tax and Money’s job is to

    manage systems and warn if investment strategies are likely to have negative effects such as fuelling inflation, increasing the national debt or pushing households into unsustainable debt levels. This process will generate a full spending plan which is the financial foundation of a four-year term in government. The Department of Investment would then monitor this budget annually and make necessary adjustments if things change or unforeseen circumstances arise.

    In a four-year parliamentary term this process should start in the final year so plans for the succeeding four-year term are well into development when elections take place. Opposition parties should get access to this process and the civil service which is undertaking it which means that, working from the same broad information, they can make different assumptions and make different choices. If the data says there is a funding shortfall in a public service one opposition party might opt to increase spending while another might choose to cut services. This means that in a Scottish Election, all the parties would be able to present realistic, broadly-costed manifestos which the public, Civic Forum and Citizens’ Assembly can assess against the Auditor General’s report about the impact of their decisions. This will make for a much more informed election and will mean parties can be called out for unrealistic promises or risky decisions. Whichever party is elected would then rapidly finalise a four-year budget which would be published within six months of the election (the last six months of one parliamentary term and the first six months of a new one would be an overlapping budgetary year). At the moment budgeting is an annual process with little overlap, which means that as one budgetary year comes towards an end, managers in public services do not know what resources they will have to work with in the coming year. This is bad for planning.

  • The process for setting budgets is all very well but, more importantly, what’s the strategy? In particular, in the first ten years of independence, what is the point of public investment and what do we need it to achieve? Much has been made of the fact that the Scottish public sector spends more than it raises in tax, suggesting that, once independent, we wouldn’t be able to afford the public services we have. This poses the really important question; why does Scotland raise less in tax than its public expenditure? Is there something fundamentally wrong with Scotland?

    Yes there is. What is fundamentally wrong with Scotland is that it is a region of the UK. We think of ourselves as a nation because we are and have always been a nation, but that doesn’t mean we have been treated as a nation. Nations run their own economy in their own interests. The UK runs its economy for the interests of London. Nations have the infrastructure of major capital cities, embassies, big company headquarters, and stock exchanges, but Scotland lost these to London. Nations have armies of civil servants in the country, working for the country but Scotland has enormous numbers of civil servants working ‘for them’ from outside the country. Nations have infrastructure that links them to the wider world, like major transport hubs, government departments that negotiate international relations, exporting ports. But little of the infrastructure which ‘serves’ Scotland is actually in Scotland and most is in London. Exist like this for three hundred years and gradually your nation turns into a region.

    And being a region of the UK is punishing (if you’re not in London or the South East of England). In fact, the only region of the UK which actually raises more tax than it spends, or which has an economic performance better than that of the UK average is London. That’s because no other European city comes close to hoarding more of the nation’s wealth than London does – the average European capital city takes about twice as much wealth as its per capita share. London takes five times its share. This is why virtually all areas of Britain underperform the UK average, because what is measured is not the failure of everywhere else but the greed of London.

    Scotland doesn’t raise as much public income as it should because it is a regional economy and not a national one. Until Scotland has an economy and infrastructure which looks like a proper national economy it will never be able to achieve its potential. So the top priority is to become a modern, national economy.

    That makes the strategy clear – public investment must transform Scotland from a region to a nation and must do so as quickly as possible. This is not as hard as it may sound, but it does require a newly independent Scotland to take itself seriously and to back itself. Throughout this book (particularly in the Foundations and Industry chapters) a lot of the detail of how to do that is discussed in more detail. But there is no magic – like any enterprise Scotland has to invest more into the nation than it takes back out again. Driving transformation unequivocally needs the resources to build new things and the stimulus that building new things creates. This virtuous loop makes the task possible because the steps required to create transformation in themselves create substantial economic stimulus and development. It is that economic development that makes it possible to invest the resources.

    Some of this impact will happen almost overnight – for example, simply repatriating all the civil service jobs which are meant to serve Scotland but are actually located elsewhere in the UK (up to 20,000 of them) creates new jobs here, and so generates new tax revenue. The people in those jobs spend in the economy and that creates more economic activity which supports more investment. Some of it will build – if we use an industrial policy to create new, medium-sized businesses it will take a little more time for those businesses to grow.

    The key to all of this is the ability of the nation to absorb, successfully and productively, the investment being made. So long as the economy of a nation is taking the injection of new investment and using it to create economic outcomes which are of more real value than the scale of the investment, it can continue to grow. In the case of a newly independent Scotland that is easy, because as described above, we are economically underdeveloped. When the UK tried to stimulate the economy by cutting taxes, money markets lost confidence almost immediately because the economy of London is overdeveloped – it is already so inflated with ‘cheap money’ that it just doesn’t have the ability to absorb a lot of new money and use it productively. That is why the UK as a whole was unable to sustain market confidence in borrowing money to stimulate the economy through tax cuts. Scotland is in a completely different position. When an economy has big opportunities which are not being developed it is known as underdevelopment. Precisely because Scotland’s economy is underdeveloped it has enormous amounts of potential new investment (our energy resources alone can underpin substantial public borrowing). So long as it can generate return on investment it can keep investing.

    This can’t go on forever – as with the London example, eventually you reach a stage of overdevelopment where the real economy can’t successfully absorb more money. At that point investing to develop hits a barrier and you just mount up more debts without the economic success to underpin them. The whole aim is to make sure that Scotland is transformed into a nation that has a more developed and therefore more balanced economy long before it hits that barrier – we need to hit a more ‘steady state’ position as soon as we can. But that is not a barrier Scotland will face in its first ten years. Over this period, it is simply imperative that Scotland spends more on transformation than it takes out of the economy in tax – we absolutely must run a deficit. How that will be managed is discussed in the next chapter.

    group of manufacturing businesses. Scotland’s economy would ‘grow’ – but everything would get worse for Scotland and its people.

    The ‘economy’ is measured in just about the stupidest, most sim- plistic way possible. The whole complexity of the many currents which are flowing through Scotland’s many industries: businesses rising and falling; sectors declining and emerging; job quality and wages improv- ing or (mostly) deteriorating; environmental and social impacts helped or harmed, are all summed up and represented by a single number – Gross Domestic Product or GDP. It has been the great trick of the economic ideology which has dominated the world since the 1970s to believe that you should only ask whether GDP got bigger and you should never pursue government economic policy for any reason ex- cept to make GDP grow. The consequences of this are what this newly independent Scotland must untangle.

    But the fact that growing GDP has such a high tendency to create damaging social outcomes does not mean that falling GDP is better. When industries are doing the right things, creating good jobs and useful goods and services and generating profits so they are sustaina- ble and can grow, it creates wealth. When done right it creates wealth for its employees and wealth for the company and its owners. A society that creates national wealth can invest more of that wealth into public services and national infrastructure. If public investment is made in the right way it too creates good jobs and demand for domestic supply chains which in turn creates wealth. But for that virtuous circle to work the wealth has to work for the whole nation, which means it has to be retained in the national economy and it has to be spread across the nation. If the wealth is highly concentrated only in a few parts of the country or only in the hands of a few people, the virtuous circle is bro- ken. And if too much of your economy is foreign-owned and extracts

    too much of the wealth to overseas shareholders, again the virtuous circle breaks down.

    We need a panel or dashboard of national-level indicators which cover the real priorities we have set ourselves to achieve greater quality of life. As well as 'Gross Domestic Product' we need 'Gross Domestic Health' (a measure of whether aggregate health is improving), 'Gross Domestic Mental Health' (the same for our minds), 'Gross National Anti-Social Crime' (are we getting safer), 'Gross Economic Sufficiency' (are we reducing poverty), 'Gross Economic Security' (we are increasing economic security', 'Gross Environmental Wellbeing' (is our air cleaner, our seas clearer, our wildlife thriving, our carbon emissions declining). It must be a limited, deliverable set of indicators and they must always and only be published together. If GDP is rising and all the other indicators are declining, then we know that the way we are raising GDP isn't working.

  • The bill for investment in new national infrastructure will be part of the negotiations over the finances of Scotland’s separation from the UK and will only have to be paid once, so it is the kind of straightforward capital investment that nations fund through borrowing. But there is another kind of transformation we need to make – an industrial transformation. The UK has terrible rates of productivity because it has for a long time now operated a policy of keeping the cost of borrowing low to encourage debt-based spending by households and to facilitate the kind of financial speculation in which the London economy specialises. The flip-side of this is that because the returns on lending or investing money were very low it was easier to increase wealth by speculating over the short term than it was by investing for the long term. Which is to say that if you can gamble that a property’s value will

    increase over six months, why put your money into an industry which might take three years to return a similar gain? The thing is there is no increase in the underlying value of the property (it is the same bricks and mortar as before) so there is no productivity increase, so no real value is added. Investment in the industry would have created real added value, so increased productivity. As speculation overtook activities like manufacturing as the foundation of the UK economy, a price was paid in productivity.

    Productivity is (very roughly) how much value is created per hour worked. If you are making your national wealth out of what is effectively high-value gambling on the value of assets (few jobs required but high pay) and by fuelling low-value debt-based consumption (lots of jobs but low pay ones), you end up with low productivity irrespective of the amount by which your economy is growing. That is the cycle which Scotland has to escape. We need to find ways to fuel economic transformation to rebalance Scotland’s economy so that it is much more productive. That is what will underpin the national transformation Scotland needs.

    That need arises at a particular moment in time when we must take large-scale, radical action to tackle climate change. This is another priority for investment, so it is clear common sense that Scotland should seek to combine these challenges. It doesn’t make sense to invest to transform Scotland’s economy into a national, high-carbon economy and then to invest again to convert that high-carbon economy into a low-carbon economy. We should do both at once – in fact we should do one by doing the other – plan to decarbonise our economy in a way that transforms it from a regional to a national economy over ten years. This possibility will be explored throughout the book.

    So what Scotland needs is a plan which will do three things at once; reindustrialise the economy, increase productivity and decarbonise the economy. It shouldn’t limit its industrial policy to green reindustrialisation but that should be at the heart of it. A more general industrial strategy is discussed in a later chapter and a specifically green industrial strategy to decarbonise is a focus of the Resources section. Both can be stimulated through public investment.

    Collectively, the approaches outlined above describe Scotland’s fiscal strategy for the first ten years. It must absolutely not cut or squeeze public spending but do the opposite, not forever but to achieve a specific goal of transformation which, when achieved, will enable a new, steady-state fiscal strategy. Borrowing to transform Scotland’s economy and infrastructure from regional to national through a green industrial strategy that can self-sustain through revenue is the first transitionary strategy Scotland will need in its initial decade of independence.

    Finally, you can of course have success by doing the wrong things, particularly if you’re not responsible for dealing with the damage you do. That may be in your interests but it is not in the interests of every- one else, and it should be in everyone’s interest that a government op- erates. No-one suggests that economic activity should be an absolute free-for-all where people can do whatever they want irrespective of the consequences – polluting rivers, dumping hazardous waste, kill- ing wildlife, holding customers to ransom, damaging people’s health.

    94

    95

    These are all ‘externalities’, things which happen externally to the busi- ness or industry sector concerned but which are caused by them. Reg- ulating businesses to stop them doing harm is always necessary, but we can go beyond this. Public policy can help businesses to adapt, to do things differently or do different things. A genuinely great industry sector doesn’t just create wealth and provide goods and services, it creates positive externalities and minimises negative ones. Govern- ment is a partner in helping businesses and industries to achieve this.

    That is the broad goal of an industrial policy – to ensure the nation has the goods and services it needs (National Resilience), to build and distribute wealth (National Wealth Building), to encourage inno- vation and long-term planning (Creative Adaptation) and to maxim- ise positive externalities and minimise negative ones (Regenerative Industry).

  • The second fiscal strategy for the early years of an independent Scotland is to escape another legacy of being a region of Britain – failure demand. Failure demand is when large amounts of public spending are absorbed by social failure, like widespread poverty or addiction or avoidable heart disease. Failure demand creates a negative, destructive loop – because you are paying so much to pick up the pieces of failure the investment needed for prevention becomes much harder to find causing more demand on services, and

    so on. The relentless right-wing economic model pursued by Britain and the gaping inequality that resulted in Scotland being plagued by an enormous amount of failure demand.

    Everyone knows that the solution to this is to move funding ‘upstream’, to shift the balance of public investment away from remedial action and towards prevention. But no-one has ever successfully done that from within static budgets- the simple reason being you can’t withdraw funding from remedial action without making the problem worse. If your health service has a problem resulting from avoidable ill health and you pull funding from treatment and redirect it towards prevention, the people who would have got treatment but now don’t will simply see their condition worsen and, in the end, that will cost the health service even more. And, of course, leaving people without proper treatment is inhumane. This is the trap, the endless loop of failure demand. The only way to break the cycle is to do something different, to find a way to both keep up the remedial activity and invest to break the cycle as well.

    This, again, is something you shouldn’t have to do twice and is only necessary for a time-limited period. It is also something which, if it succeeds, will create a steady-state outcome which is permanently better than what preceded. Without failure demand public budgets go so much further (countries with gold-standard health services don’t spend more on health than we do, they just don’t have the burden of ill health we do). Like adapting to climate change, investing to break the cycle of failure demand creates other large opportunities. So it makes sense, as far as possible, to invest to break that cycle at exactly the same time that you are investing to transform the economy and wider society.

    But this spending cannot go on forever without creating unsustainable pressures on public finances, so a clear, time-limited plan is needed with specific and workable interventions to tackle the causes of failure. This plan must be ‘ring fenced’ – it cannot just be tangled up with wider public service budgets or it will become too difficult to untangle it again when the time comes to move back to a revenue-focused investment strategy. All public services which face failure demand must devise costed plans for how to break the cycle which are distinct from their other core work. This would then become a specific part of the budgetary process for the first decade of an independent Scotland.

    To give you an example of what this might mean, the steps that a health service might propose could involve a one-off investment to create lots of new, small-scale community hospitals to increase capacity (lack of capacity causes enormous avoidable costs), an accelerated process of health workforce expansion and a targeted package of regulation and investment to tackle causes of ill health like smoking, addiction, poor housing and diet. If diets can be changed, addiction reduced, capacity increased (and so on) within five years, that creates a model for a five-year cycle-breaking investment programme which will come to an end at the end of the period. A time-limited failure cycle-breaking investment programme will mean that, as an independent Scotland settles fully into normal life as a country with a stable fiscal approach at the end of its first decade, it could be doing so without one hand tied behind its back.

  • Another key strategy for public investment is to recognise that not every public good comes from direct public spending. There are many ways for Scotland’s social and economic interests to advance without relying on public funding. For example, Scotland’s vast renewable energy potential can pay for its own development through a National Mutual meaning that citizens can accelerate the development without increasing public expenditure. Rather the National Mutual (see the Democracy chapter for more information), operating as an independent business owned by all Scottish citizens, can borrow like any other business, develop infrastructure like any other business and pay off the borrowing through the cost of selling electricity, like any other business. But unlike any other business it can do this in the public interest, rapidly for national strategic reasons rather than gradually for corporate commercial reasons. None of this would appear on public spending records or count against public sector debt.

    There is quite a range of revenue-raising services which can work in the same way, services where the public good also raises commercial income. Some like energy and public rental housing can easily deliver enough revenue to pay for themselves without subsidy. Others like transport or tourism infrastructure may need public subsidy but can still be managed as a public-good enterprise which can generate more of their own income by improving and attracting more customers. Wherever there is an opportunity to free public service from financial reliance on direct public spending but to remain in the public domain through mutualisation, investment can be achieved without increased public spending.

The To Do List

  • Tax and managing a money system are often treated like they are accounting practices – that the role of the government is to ‘balance the books’. The purpose of government in managing money isn’t to balance the books but to balance the money system. Balanced budgets that cause a recession aren’t balanced at all and neither are budget surpluses that close down businesses. If the last two decades of monetary policy have shown anything at all it is that you can run consistent budget deficits with no problem so long as the money system stays in balance and there are real, productive ways for the economy to absorb the investment. The state is not like a household and the goals aren’t to ensure that every penny out is matched by a penny in. The goal is to ensure that all of the elements of the money system are working for the greater good – interest rates set at the right level for the economy, inflation at a sustainable level, adequate liquidity (having enough money moving round the system), exchange rates which balance the need to import with the need to export and so on.

    This is sometimes taken to mean that no discipline is needed in managing money systems if all looks well. That isn’t true; maintaining a suitable monetary environment requires great discipline – it’s just a different kind of discipline from balanced budgeting. It just isn’t correct to say that running large budget deficits has no consequence, because it does. It can create inflation, reduce lenders’ confidence in your economy thus putting up borrowing rates and it can lower the value of the currency, increasing the cost of imports. But on the other hand it is true that if a government owes money to its central bank (essentially, owing money to itself) then periodically it is possible for the bank to write off a proportion of the debt where it is not going to lead to inflation. Progressive monetary policy is neither the free-for-all some believe nor the unyielding straightjacket others imagine.

  • But first, it is important to recognise that an awful lot of Scotland’s economic activity and some of the most important economic activity to the wellbeing of the nation isn’t so much part of a national industry sector but is really part of a very local economy. Many of the most important businesses for Scotland’s citizens are local retailers, local tradespeople, local services, local construction companies, local hos- pitality businesses. Often their success will rely at least as much on the success of other local businesses as on national or multinational ones. The local electrician or plumber needs a local construction com- pany to buy their services, the local accountant needs the local pubs and restaurants to buy their services, the local farmer needs the local butcher to buy their meat. These are all local systems of economic interdependence and these are certainly not best supported by gov- ernment offices in a city a long way away from them.

    So what remains of business support services should be decentral- ised right down to the most local area. First, there is an important role for Regional Economic Development. The Regional Councils should all be given additional budget and economic development responsibility as the centralised national economic development agencies are abol-

    ished. Each of these should create Regional Industrial Strategies. Scotland has been terrible at recognising that every region, every dis- trict, every part of Scotland has unique strengths and weaknesses and that an economic strategy for each of these regions should be built on its strengths. In fact it is almost certain that most Regional Councils will be serving areas where it makes clear sense to have a number of regionally-focused industrial strategies.

    Take Dumfries and Galloway as an example. Many of the economic problems of the very South West of the country are directly related to its poor transport links (served by only one rail line and only two trunk roads which are largely single carriageway). And yet it has one of Scotland’s most important transport links – by sea to Ireland and beyond. It has great food and drink infrastructure, a good quality of life which is attractive to those who can remote work, stunning scenery and picturesque towns which offer boundless tourism potential, some of Scotland’s best-developed forestry and so much more. Why does it struggle so much economically? Why doesn’t it have much more wood processing industry? Why does it struggle to market its food products to the rest of Scotland? Why aren’t we building export strategies based around Cairnryan’s port? Why isn’t Scotland building better transport links to the area? The answer to all of this is that Galloway’s economy has never been a priority for central belt economic development which has been obsessed with financial services.

    But Annandale, a different region of Dumfries and Galloway, has quite different strengths and weaknesses. It is a major gateway to the UK, has extremely good transport links thanks to the M74 and the di- rect road link to the exporting infrastructure around Stranraer, and also has wonderful food and drink production. Why isn’t it a distribution hub for goods coming from England? What other opportunities does the new national border open up? It was an important region in Scottish history and so has much tourism opportunity based both on landscape and history. It has an existing timber processing industry which can expand and diversify and extensive forestry. This means it has over- lapping but not identical opportunities to its next nearest neighbours. And this is why regionalised development is important.

    Scotland needs an industrial policy for... everywhere. And this goes down below the regional level to the really local level. Even more than regional economic development Scotland lacks development plans for its towns and villages and for parts of its cities outside the city centre. So much of the responsibility for on-the-ground economic develop- ment should be led by Development Councils working at the town, village or sub-city level. If a town believes it can invigorate its high street by converting some empty shops into interesting cooperative buildings, or by providing better off-street parking, or by having more places to stop and have a coffee, or by greening and beautifying the street, or by marketing itself as a niche market for a product (perhaps like Wigton has marketed itself as ‘the book town’), it must have the re- source and power to do that. If local businesses need help, they should be able to go to the Community Support Office and access it there in the context of the local plans.

    Development Councils should have no limit on their ambition and should be free to be creative. If a town has a great, under-developed tourism offer it should create a plan to develop it. If it has natural features which could be made better use of (a river suitable for active sports, lovely but un-signposted walks in the area) it should be able to create a plan. If a town fancies being really creative and developing an Augmented Reality interactive game based in the town, it could try that too. People in the places where they live are best able to identify their

    own assets and strengths, opportunities and development options. And, crucially, local businesses can also network and come together to build better links and development plans for themselves, easily engag- ing with each other through a Development Council where they live.

    This leaves a number of functions currently the responsibility of centralised economic support agencies which would revert directly into government, in particular the large, focused interventions which make up a national industrial policy. This model results in support for industrial and business development being as close to those it is supporting as possible. Industries get support and develop their sec- tors through Industry Councils,; the business community as a whole interacts with government via a National Business Council; regional- ised development plans and direct support for medium-sized busi- nesses would come from the Regional Council; and local development plans, support for small businesses and advice for new-start business- es would be accessed via Development Councils and the Community Support Office. The international networking and marketing of Scot- tish businesses would be done by Scotland International and what is left, including direct economic interventions via an industrial policy, would be the direct responsibility of government.

  • The first and most important is bedding in a new currency. There are two stages to this; ensuring the currency’s successful implementation and uptake in the early period and then creating confidence in the currency in its early life. This is not the place to describe all of the steps needed to implement a new currency (Common Weal has done that in detail elsewhere, see Sources at the end of the book) other than to say that the task is intensive but well-understood so is primarily a technical process. But ensuring its uptake is crucial, because no-one will be compelled to convert their

    own money into the new currency. The first way to do this is to require public payments (like tax, public rental charges and public transport tickets) are made in the new currency, and that all public sector wages and the Universal Basic Income are paid in it. This will mean that it will be in the best interests of the vast majority of people to manage their income and main banking in the new currency. Fairly quickly the new currency would be the only legal tender in Scotland.

    But not all of Scotland’s money exists as income; much is either savings or invested in mortgages or pensions, and people will not be compelled to convert that money. It is not fundamentally necessary for a government to get people to convert that money but there is a strong strategic reason to do so – we want people to invest their money in Scotland. This is a really important factor; if the debts of a nation (both household and public) are held in the domestic currency rather than being held in other currencies, the government is much, much better able to manage that debt. It means borrowing rates are more influenced by domestic circumstances than by international money markets. It means that the public sector can manage its debt in a wider range of ways than if its debt is held in other currencies (such as the period debt write-offs mentioned above). And the government is in a much stronger position to intervene in financial crises if they occur – better able to bail out banks, or protect household finances, or support domestic businesses.

    This means that we must create confidence in the currency so that people are willing to convert their money into the new currency and invest it in Scotland. The first step in creating confidence is managing the value of the currency in the very early stages. If a currency loses too much value too quickly then the value of people’s savings declines

    compared to other currencies and prices of imports rise, but if it gains too much value too quickly it makes exports uncompetitive and so investment in productive Scottish industry is less attractive.

  • There are four main ways in which we would want to maintain the value of the currency – pegging, interest rates, competent management and economic success.

    Pegging a currency means linking its value to another currency or another basket of currencies. The advantage is price stability and the disadvantages are that it can be expensive to achieve and it may well maintain the currency at a value which isn’t actually good for the economy (overvalued or undervalued currencies don’t support domestic industry well). Ideally Scotland wants, as quickly as possible, to get to the point where it maintains its currency’s value without pegging. For our economy, linking our currency to the value of another is something we’d want to do for the least time possible.

    A Scottish currency would want to peg itself to Sterling in the very early days to maintain price stability. To do that it needs to have a significant foreign currency reserve. This is basically a large ‘savings account’ where you keep national savings in other currencies. A country needs one of these for a number of reasons but managing exchange rates is one of them. How it works is that if there are pressures on your currency which are forcing its value down you use your currency reserve to buy back your own currency, forcing its value to rise again. And if the pressures on value are upwards you sell some of your currency and put

    the income into the currency reserve, increasing supply so bringing value back down again.

    The risk with this kind of pegging is that financial speculators who think your currency is overvalued can make money by effectively betting against it. What happens is that they bet that one currency will fall in value related to another. The simplest way to explain how they do this is that they take out an IOU for one currency priced in another currency, then they sell on the IOUs when the price is still high. Selling a lot of a currency often causes it to fall in value (especially if it is overvalued). The IOU note then falls in value but the currency in which it is to be paid doesn’t, so the speculator pockets the difference. It’s like buying a car on credit based on the value of the car when the repayment is due, then selling the car to someone but fiddling with the steering, which means they crash the car, which means it is worth less, which means the amount you need to repay has dropped – but you still have the money in your pocket from selling the car at full price.

    There are two ways a country can deal with this. One is to ‘play chicken’ with whoever is betting against the currency, buy back more of your own currency keeping its value high, and see who blinks first. The other is not to bother and just to let your currency fall in value – it’s not you who loses the money, it’s whomever lent it to the trader (if your currency is rising and falling naturally for your economy and people are betting on it, that is between them). This is why most currency attacks fail – it is a gamble and a Central Bank can either take the gamble and try to beat the trader or can just opt not to bother and then the gamble is between traders.

    But this is not what will happen in the early years of Scotland’s new currency – because until large amounts of that currency are

    circulating in the global money markets, speculators can’t get their hands on enough of it to make a speculative attack possible. During the transition period prior to fully introducing the new currency the risk is zero. In the very early months and years the amount of Scottish currency held overseas will increase, but that still leaves little scope for those kinds of attacks in the very short term and the goal is to remove the peg as soon as possible anyway. Plus as we will see below, Scotland’s currency may be more likely to rise in value against Sterling than drop, and that is much easier to manage.

    On independence Scotland would peg its currency to Sterling to maintain price stability. It would then gradually increase the ‘bounds’ of the peg. The bounds are how far above or below the value of the currency to which you are pegging you let your own currency rise or fall. At first you would maintain parity (exactly the same value) but then you would increase the bounds (increasing them to one per cent means the Scottish currency could be one per cent above or below the value of Sterling before any action was taken and so on). Then when the time is right you just remove the peg altogether and allow the Scottish currency to rise and fall naturally like any other currency.

    The goal would be to loosen the peg and increase the bounds as quickly as possible with the aim of fully floating the currency as quickly as possible, but guided by economic circumstances. Continually for the early years of independence the Scottish Government, the Central Bank and the Monetary Reviewer would work together to assess how fast to widen the bounds according to the economic conditions in Scotland and the implications of trying to maintain a pegging policy. If Scotland is in a position to completely remove the peg and float its currency within the first year, that’s great. If it takes a few years,

    that’s great. But pegging is not a long-term option for Scotland, it is a transitionary measure to maintain stability in the early years.

  • Pegging is a way of ‘artificially’ maintaining the value of a currency, but there are three factors which determine the ‘real’ value of a currency – economic conditions, monetary conditions and fiscal conditions. The first is economic conditions. Put very simply, a strong economy which is capable of successfully absorbing investment pushes up the value of its currency and this is why investing in the economy in the early years is so important. As has already been mentioned, Scotland has an underdeveloped economy which is rich with opportunities to absorb investment and that is very attractive to possible investors. Making those investment opportunities available will do more to maintain the value of the currency than almost anything else. A way to help signal this would be to Hypothecate Bond Issue, which is a complicated way of saying that you can issue bonds to borrow but make clear the purpose of the money raised and where it will be invested. For example an ‘Energy Infrastructure Bond’ would indicate the scope of investing in energy infrastructure while an ‘NHS Capacity Bond’ could indicate that failure demand in the health service would be reduced by increasing capacity. All of this is where the risk of the currency appreciating in value too fast comes in (which makes prices in the shop lower but harms the ability of exporting industries). Scotland’s monetary policy must be managed carefully with this in mind. The next chapter will look at industrial policy and the range of ways that Scotland should increase the economy’s capacity to absorb investment.

    The second factor in underpinning a currency is fiscal conditions. What that means is that the markets have confidence in what the government is doing – not borrowing more than it can repay, not making tax changes which work against the economy and so on. The tax and borrowing regimes are therefore discussed below, but those is only part of the picture. Because Scotland wants to pursue a much more standard productivity-based model of economic development than the speculation-based model the UK has used, its finances are much more straightforward. The UK’s national accounts are complex and confusing on purpose. What Scotland should do is absolutely maximise transparency. We have nothing to hide and everything to gain from letting investors understand our strategy. Scotland should produce a full fiscal business plan, explaining clearly and transparently what we’re trying to do, how we’re trying to do it and how it is planned to work. Then it should publish simple, clear, national accounts with a clear statement of the national balance sheet. The UK doesn’t do this because, frankly, too much of its balance sheet involves complex ‘financial products’ which it doesn’t really want to advertise. Scotland would be playing the game much more straight and so can easily put its cards on the table. The reason for the value of the currency of the nation is then also clear and transparent, increasing confidence.

    The third factor is monetary conditions – the way the country’s money system is being managed. If investing money in an economy gains you higher returns, that tends to increase the value of its currency. So if interest rates are higher, investors get greater returns from real investments into the economy and attracting investment will strengthen a currency. Higher interest rates also encourage productive long- term investment and disincentivise short-term currency gambling, which is very good if your long-term goal is to emphasise increasing

    economic productivity. A modern economy aiming to increase patient investment, reindustrialisation and productivity would want to run a higher interest rates policy (which also helps control house price inflation). That strategy faces a barrier because of levels of household debt, and so that must be tackled. But this is the basic strategy for an independent Scotland’s currency – be productive, be transparent and be high-value.

The To Do List

  • There is a problem with a high interest rate policy; super-low interest rates were used to encourage people to borrow more and more to boost struggling economies after the financial crisis and now UK households are heavily in debt and so increasing interests rates significantly does very real harm to household finances. This has created a trap – the ‘cheap money’ which was used to give the economy a ‘sugar rush’ high when it was in difficulty has created an economy which is now reliant on a constant supply of sugar rushes. This has been very bad for you and very good for the corporations who lent you the money and then sold you things with the money it lent.

    At the moment the responsibility of government fiscal and monetary policy is to manage the sustainability of the national debt. This is not enough; a key responsibility of the Department for Tax and Money should be to ensure sustainable household debt (the debt owed by citizens). Because of the position in which we begin, this will have to start with a major Household Debt Reduction Programme. There are so many reasons for reducing household debt – it traps people in

    poverty, forces them to work too many hours, reduces their mobility, harms wellbeing, reduces civic participation and inhibits risk and innovation. Debt has been one of the main ways that large amounts of wealth have been transferred from those who don’t have money to those who have a lot of it. But fundamentally we are running out of road for increasing debt. Both productivity and borrowing have hit a limit with the economy we have because growth has come from increasing incomes not through wage growth (which has stagnated) but borrowing growth. That clearly can’t go on indefinitely and we are reaching the limits now.

    There are two kinds of debt; secured debt (you have borrowed the debt against something with value) and unsecured debt (loans, credit cards, hire-purchase and so on). Secured debt is almost always secured on a property – a mortgage – so to reduce the total secured debt we have to reduce house prices. This in itself is a trap because of ‘negative equity’. If people have bought a house at an inflated value using a mortgage and the value of the house drops then the owner can’t repay the mortgage by selling the house, trapping them in the house and into repaying the overpriced mortgage. So the first priority is to prevent the problem getting worse by halting house prices rises. Higher interest rates (as above), a more progressive Property Tax (discussed below), increasing housing supply by disincentivising buy-to-let and second homes and increasing the supply of quality but inexpensive public rental housing (discussed later in the book) are all ways to do this. In fact even just if a government were to say that controlling house price inflation was a national policy, that would immediately have the effect of making clear to the speculators who push prices up that they could no longer rely on constantly-rising house prices, removing inflationary pressures. It is patently obvious

    that house values cannot keep rising faster than wages forever and at some point such a system would create a very damaging crash. The goal is to stop the bubble bursting by letting it down slowly and in a controlled way.

    That doesn’t do anything to address current house prices. Here the Department for Money should take an aggressive approach with lenders. Mortgage providers have made stupendous amounts of profit from inflating house prices in recent decades and the goal should be to make them return some of that in kind for the public good. There are four ways that could be done. The first is simply to negotiate with lenders to get them to accept a ‘haircut’ (accepting a loss) on existing mortgages to prevent government from having to take further action. They would cut the value of a house and the mortgage associated with it by an agreed amount. Should that not work there are further options.

    The first would be a windfall tax or increased ‘lenders tax’ on lenders to achieve the same outcome through public subsidy. Another is to expand upon the Mortgage to Rent Schemes already run by Scottish Local Authorities where the National Housing Company (see later) would provide resources to enable Local Authorities to bring houses into the social housing pool in batch in return for offering the existing occupants secured tenancy and steady rental prices. This would give it a strong negotiating position to force lenders to take a haircut. And for those who want to maintain ownership of their house they could take advantage of a National Mortgage Transfer Scheme where you are able to transfer the mortgage on your house to a National Mutual Bank (as below). Doing that in volume would again create a strong position to negotiate for a haircut. Between these approaches the short term cost of housing could be reduced and, in the medium and long term,

    freeze house prices. This would return houses to being places which enable people to live a good life, not places that can make a few people very rich.

    Unsecured debt is only a tenth of the size of secured debt, but has two major problems. First, secured debt is a debt, but it also gives you an asset (usually a house that you will own) whereas unsecured debt is unlikely to leave you with an asset big enough that you are able to sell it to pay off the debt. Second, unsecured debt is a much bigger problem for low-income households and often has high interest rates because the lending is riskier So to start, the Department for Tax and Money should set a National Debt Ratio, a cap on what the government believes is an affordable level of debt in relation to household income. Twenty per cent is often taken to be a credible debt-to-income ratio, which is to say the cost of paying off all your debts should never amount to more than a fifth of your total income. Credit ratings (the calculations which are done on your finances to assess whether you are capable of borrowing) should be nationalised and run in the public good. A National Credit Agency would provide you with an accurate credit rating and a means of appealing it. This would prevent unscrupulous lenders from lending beyond an affordable debt level and it would enable the credit system and the debt support system to integrate.

    The way this would work would be that if any citizen reached an unsustainable debt level they would be referred to the National Care Service (discussed later) which would offer Debt Management Programmes overseen by the Credit Agency and supported by the National Mutual Bank. This would consolidate all the debt into one place, again with aggressive negotiation with the debt holder. Debts

    owed to the public sector (Council Tax, benefits repayments, hardship loans) are largely defaulted on anyway and so simply cancelling these is revenue-neutral for government and local authorities. A ban on evictions would force landlords to negotiate with the Credit Agency to identify an affordable repayment sum for rent arrears. Most energy debt is also defaulted on so those holding energy debt would be asked to write it off. What remains would be consolidated into a single debt management loan via the National Bank, to be repaid over a long period. There is scope for these repayments to be subsidised to be interest-free in the worst cases.

    Finally, to prevent the problem recurring strict regulation of lending would be overseen by the Credit Agency. All forms of credit would be covered, including schemes such as ‘buy now, pay later’. There would be a legal cap on the total cost of credit being offered by a lender. For example, a 100 per cent cap would mean that it would become illegal for anyone to charge more in interest than the value of the product – the total cost for buying something that’s £100 could never be more than £200. None of the above is unusual – debt is written off all the time and as debt has become increasingly unaffordable for many, this trend is likely to accelerate. Using all of these measures the total level of household debt in Scotland can be continuously reduced. The principle underlying this plan is that planned debt management policy is less damaging than unplanned, uncontrolled debt defaults which can rapidly spiral into economic crashes of the kind we’ve seen many times in the UK – notably the 2008 Financial Crisis.

  • Transparency in a nations accounts was put forward above as a key means of securing market confidence in a Scottish currency, but this has an obvious condition – that markets believe you are managing your national finances in a sensible way. What markets don’t like are steps like spending more than you can afford, borrowing more than you can repay and raising or cutting tax in ways that harm the economy or boost inflation. Tax will be considered below and a fiscal strategy for the early years of independence has been outlined above, but since that involves borrowing, what restraints will there be on public borrowing in a newly independent Scotland?

    Scotland starts out independent with very little debt because the Scottish Parliament is prevented from getting into much debt by having very limited borrowing powers. The UK debt is held by the UK Government and debts can’t be transferred, so whatever is negotiated during the process of Scotland becoming independent, it will not hold the UK’s debt or any share of it. There are two internationally- recognised ways of dividing up the debts and assets of a nation in the event that it becomes two nations – either both get a fair share of everything or one retains the rights to everything other than the in-country assets of the other (like public buildings and roads) which starts fresh with no other assets, but no liabilities. The UK made clear that Scotland will not be getting its fair share of the Bank of England, its embassy network or its military hardware (among other things). So having failed to be given a fair share of assets Scotland will not be required to accept a proportionate share of debt. Nor would we be

    expected to take on liabilities for decommissioning assets (like oil rigs or nuclear power stations) which were built up when we didn’t own the assets. During negotiations, depending on what Scotland is asking for, we might agree to a time-limited annual payment to the UK in lieu of some proportion of the UK’s debt, but that isn’t sovereign debt either.

    This means that Scotland will start out with a low level of debt and debt liability which is a good thing for securing lending. But the flip side is that Scotland will have almost no credit history – a bad thing. Having a higher national credit rating is a measure of market confidence in your nation’s ability to borrow, but its impact on the real costs of borrowing are strictly limited. If you look at the real costs of borrowing (bond yields) there is as much variability within a given credit rating as there is between them. So it absolutely does not follow that having a higher credit rating automatically means lower costs – as discussed above the much bigger factor is the ability of the economy to absorb investment.

    Nevertheless, in the early years Scotland might have to pay a slight premium on its borrowing costs on international money markets while it builds up its credit history. However it is important to put that in perspective because again nation states don’t behave like households do. Nations generally borrow by issuing bonds. These are promises to pay back the cash value of the bond in 10 or 20 years and an annual percentage of the value of the bond until it is repaid. This is attractive to investors because nations are very reliable (they don’t often disappear and seldom go bankrupt) so they can offer a reliable asset and a reliable return for your investment. The annual cost of this debt is therefore low and even if Scotland had a slightly higher bond rate (how much it had to offer in annual payments to bond holders) it would still be small in comparison to public finances.

    The key is that in the early years of independence Scotland should only use that borrowing in ways that improve its fiscal position, either through economic transformation or by reducing the cost of failure demand. If it does that successfully it generates much more public income than the cost of the lending and so remains easily financially sustainable. Scotland would not need to borrow anything like the average levels of debt of a European country to be able to invest very significantly and even the simple economic boost of spending the money will have a significant effect on public finances. None of this means that borrowing capacity is unlimited and it must always be monitored closely, but borrowing for effective investment will always be possible.

    There is another strategy Scotland can use to decrease the cost and risk of borrowing and that is to do as much of it as possible in our own currency. The first way to do this is to direct tax-incentivised savings towards domestic investment. Perhaps surprisingly, given how much emphasis is placed on international money markets, more than 80 per cent of assets in the UK economy are tax-incentivised savings – mainly pensions, mortgages and ISAs. Offering those who manage those asset productive investment opportunities in Scotland will attract large investment in the domestic economy in the domestic currency. This is extremely safe borrowing for a nation state. As we have seen, in a crisis a nation can use Quantitative Easing to create money to underpin any borrowing which is done in your own currency.

    The value of ISAs (tax-exempt savings bonds) in the Scottish economy is about £8 billion, and that in a low-interest, high-debt economic environment. This shows the scope for encouraging people to save in ways that feed into public spending. Offering a Scottish Saving Bond to small investors based on the tax-free ISAs model

    would give Scottish citizens a regular, reliable interest-bearing savings option that would also create low-cost, low-risk borrowing for the government. There are also institutional investors which can lend to government in the Scottish currency, particularly pension funds. Negotiating with domestic pension funds to buy Scottish bonds and creating a National Pension Scheme (discussed later) would enable a lot of national debt to be held in the national currency.

    An even more powerful potential option for managing national debt is to borrow directly from the Central Bank. In the past this was viewed as risky and so was broadly prohibited, but that reality changed radically in the era of Quantitative Easing. It is too complicated to go into here, but in effect and despite a lot of disguising of the fact, the Bank of England has effectively been lending money directly to government (especially during the pandemic). Making that process more open and transparent means that it is possible to do this without harming market confidence. Effectively the Central Bank would hold an ‘overdraft’ on behalf of the Scottish Government, clearly marked out on the national balance sheet. The Scottish Government would then behave like an investor and hold National Equity Capital. The money it borrows is an investment into the equity of the future of a nation and its Equity Capital is how much it has invested in its economy in expectation of future rewards. Depending on economic conditions the government can then either repay National Equity Capital or the Central Bank can write some of it off. To ensure this is sustainable and serviceable it would be done in cooperation with the Auditor General, the Monetary Reviewer and the Central bank.

    A final strategy for public borrowing is not to borrow as the state at all. The Scottish National Investment Bank working with National Mutual Companies means that major social and economic transformation can

    be undertaken without loading government with debt. For example a National Energy Company borrowing from the National Investment Bank to build energy generation capacity is a very low-risk model for economic transformation which is in the public interest but which does not add to the national debt. Where transformation can be achieved through public ownership but not through the state (energy, housing, transport), this increases further an independent Scotland’s transformational borrowing capacity.

  • All of this leads to Scotland’s tax system, and this needs more than reformation – the madness of the UK tax code means that a tax system must be totally rebuilt. While this is difficult to believe, the UK tax code is a full 12 times longer than the King James Bible and continues to grow all the time. It is complex, littered with deliberate loopholes, sticking-plaster measures which outstay their need and years of illogical electoral bribes. To start to rebuild a tax system we should begin with a clear statement of what tax is for. Tax is to reclaim money the government has spent into the economy, to give value to the currency, to shape and influence the economy, to redistribute wealth and to reprice any goods and services (for example to discourage smoking or to include the cost of waste disposal in the price of a product). A flexible and efficient tax system should therefore be able to facilitate all the reasons we tax in the first place but in the least complex, most consistent and most transparent manner.

    Once these principles are set and Revenue Scotland is expanded to enable it to carry out all the functions of a national tax-collection agency, building the tax system can begin. There is a continuing risk that Revenue Scotland is excessively influenced by big business in the way that the UK’s HMRC is, so it should not be directly answerable to politicians but to a Council which should oversee its governance and be statutorily required to represent all interests. That means large business, smaller companies, the self-employed, pensioners, trade unions, the staff of Revenue Scotland, charities, the Civic Forum, Regional Councils, the government and the tax profession all being allowed to nominate one Council Member. Then the Independent Monetary Reviewer should be given four tasks related to tax – first to act as the internal auditor of Revenue Scotland, second to audit the tax proposals the government makes to check their credibility, third to review whether those claims are fulfilled in practice by checking the reality of what new tax changes achieve and recommending changes if any have failed to achieve their stated purpose, and fourth to audit the difference between the amount of tax that should be paid each year and the amount actually collected (the tax gap). All this should be produced promptly and made public in an Annual Tax Report. This provides the capacity to collect tax and provide the necessary information to set good tax policy.

    Then a series of taxes must be put in place. An Income Tax should be charged on all income – from employment, self-employed income, pensions, benefits and investment income including rents, interest, dividends, income from trusts and so on. Then we need a Profit Tax which is a tax on business profits. To make this robust, companies which operate in more than one country should be taxed on their total global income in proportion to how much of their business is in Scotland. If their global profits are £100 million and they do ten per cent of their business in Scotland, they would be taxed on the basis of £10 million of Scottish profit. Then there would be a Value Added Tax and Transaction Taxes (like Stamp Duty) and a range of taxes where there is a need to influence behaviours. However the main way that will be done is through an Externalities Tax which would seek to capture all of the ‘true costs’ of a product or service and include them in its price; this will be explained in more detail later in the book. National Insurance would be abolished and rolled into Income Tax. Inheritance Tax and Capital Gains tax would be abolished and both would simply be treated as a form of income. As there would be a distorting effect when an inheritance arrives all in one go, the income effect of inheritance would be spread over three years.

    Local taxation (levied by Regional Councils) would be a Property Tax. This will be levied on all land and any properties which are on that land. The vast majority of properties can now be valued automatically by algorithm – by collecting the sales values of properties of the same size in the immediate area. Only a very small number of very unusual houses will need to be valued manually, and the Property Tax would require land to be valued. People would then pay a flat-rate proportion of the value of their property (for example, 0.63 per cent of a property value would replace the income from the Council Tax like-for-like, and then the tax on land would be additional). But a Property Tax should be set much higher than that so that Regional Councils are responsible for raising more of their own income and are much less reliant on grants from central government. In return, income tax would be cut so that citizens wouldn’t face a larger tax bill over all, just that more would be collected locally and less nationally. A Property Tax would act as a wealth tax as well and would be much more progressive than the Council Tax, so consideration of introducing a national Wealth Tax should wait until the impact of the Property Tax is measured.

    That creates the structures of a clean, transparent tax system. What it doesn’t do is explain a tax strategy. It is often argued that a better society needs more tax. This is true, but there is a very big caveat – that does not necessarily mean raising tax rates. There are two main strategies for this. The first is to clamp down on avoidance and evasion. Scotland loses the equivalent of many billions of pounds of tax revenue a year because the tax system is designed with blatant loopholes which enable corporations and very wealthy individuals to escape paying tax they should be due (sometimes entirely legally, sometimes on the fringes of legality, sometimes illegally). It is easy to close those loopholes. By charging business taxes as a proportion of global profits it becomes impossible for multinational companies to escape tax through complex transfers of where profits are registered.

    But there are other ways to close off tax avoidance. Scottish tax law should include not just the details of the tax rates and what it is levied on but also a Statement of Tax Intent. That would set out precisely the aim and intention of each tax, not just its nuts and bolts. This then empowers Revenue Scotland to clamp down not just on steps to dodge the letter of the law but any steps taken to subvert the intention of the law. But it should also be empowered to simply bypass any accounting steps with which it is presented where the sole purpose of the step is to manipulate the tax payable downwards. Finally, any bank which is trading in Scotland must be required to provide full details to the Scottish authorities of any account that they maintain anywhere for any Scottish resident person or company on an annual basis, including the total sum deposited in the account each year. Nothing will be more effective in tracking down tax abuse than this. Investing in proper tax compliance and refusing to let big business off the hook should drive the ethos of Revenue Scotland.

    Closing Tax Avoidance is one way to raise tax without raising tax rates, but there is another more fundamental way – what is known as ‘pre-distribution’. It is this above all which should underpin a new tax strategy. It is quite easy to understand this concept but quite surprising to see the scale of what it can achieve. When there is large economic inequality in an economy, two things happen at the same time. First, a very large number of people have low incomes and so they become either exempt from tax or they pay very little. This means that a large proportion of the population pays a very small proportion of tax. And second, a smaller number of people towards the top of the income spectrum become increasingly wealth and so, in a whole range of ways, better able to avoid tax. This means that tax efficiency – the amount raised from a given level of national wealth for a given series of tax rates – is greatly reduced. Tax is inefficient because too many people can’t pay and too many can pay but manage to avoid their burden.

    The impact of reversing this problem is very large indeed. To measure it you would take Scotland’s tax and income data, keep its total wealth the same (the same amount of total paid income) and kept all the tax rates the same but adjust the distribution of wealth between citizens. When Common Weal did this by adjusting income spread (what proportion of income each ten per cent of the population receives) to match that of the Nordic countries it raised an extra £5 billion – and that’s without touching tax rates. This concept is called ‘pre-distribution’ because where re-distribution is about redistributing wealth only using the tax system, pre-distribution is a strategy of increasing tax income by redistributing wages. The more that low- quality, low-pay jobs can be replaced with good-quality, well-paid jobs, the more tax income is raised. That is, above all, is how to create a society able to invest in infrastructure and public services by using

    an industrial strategy to create greater equality in wages. Increasing Tax Efficiency by Reducing Inequality is the foundation on which a society that puts All Of Us First is built. That is what borrowing to invest in economic transformation and to break the failure cycle is about – creating a society and an economy which can pay for public services without having to ‘punish’ anyone.

  • The final part of the money system is the banking system. The public interest in this is not to maximise bank profits but to ensure stability and security for businesses and households. It is also important to return banking services to communities which have lost them – online banking is all very well but it does not meet all needs and people need banking services where they live and work. To achieve this Scotland would set up a National Mutual Bank. It would be set up by government but, once fully operating, would be owned by its customers. Setting up a bank of this sort is straightforward so the key is structuring it to make sure it is a public service and not an economic risk. It would offer the full array of basic retail banking service, but nothing else.

    The National Bank would provide customers with accounts, debit cards, credit cards, managed overdrafts facilities and online banking services. It would offer loans and mortgages, exchange currencies, provide cash machines and payment systems and all the other basic retail banking services. But it would do no more than this; it would be a safe, cautious, conservative bank which looked after a customer’s interests, not shareholder interests. The number of customers the bank had in any given area would determine what kind of bank branch is appropriate. Where there were enough customers there would be fully staffed branches (though these might co-locate with other public services, such as in Care Hubs or public buildings) and where there were fewer customers there would be ‘bank pods’. These are small units the size of a container unit which contain an enhanced range of automated services, more than can be offered by an ATM. This would include depositing coins and notes and video conferencing with larger branches to organise mortgages or loans. The National Bank would be designed for individual customers and for small businesses and would not specialise in banking services for big business. Its whole purpose is to rebuild long-term, trusting relationships with customers, particularly small businesses which rely on local, long-term relationships to help them grow stably and securely.

    The finance sector in Scotland would be overseen by a Banking Regulator. This would be appointed by and responsible to the Citizens’ Assembly to ensure that there is no risk of corporate capture through lobbying or political interference. The Banking Regulator would take a strong regulatory approach to banking in Scotland, for example to ensure that bank investments must include enough capital to cover risk (disincentivising risky speculation). Both the Banking Regulator and the Monetary Reviewer would be provided a statement of intent by the government to describe clearly the definition of risk, corruption and transparency so that both were able to pursue non-ambiguous programmes of monitoring and enforcement to prevent the banking sector ever again being a systemic risk to the wider economy.

    Finally, the Central Bank would act as lender of last resort to banks, but it would be made very clear that the Central Bank will not bail out banks in the event of a financial crisis. It will bail out

    customers to ensure that people do not lose their savings or access to their accounts, but it would under no circumstances bail out the commercial activities of banking and financial services, particularly that based on speculation. This means that low-risk banks like the National Bank would be entirely safe and secure in the event of a crisis but customers with banks that also engage in riskier financial services would have to face the consequences of those risks.