SELECT COMMITTEE ON ECONOMIC AFFAIRS - Parliament

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Professor Robert Rowthorn—Oral evidence (QQ 188–243) Q200 Lord Forsyth of Drumlean: Yes, please do, if you have some thoughts on it. The other question is about the apportionment of the debt, which the Chairman raised. Why is it right to assume that it should be done on a per capita basis? Given that the debt has grown substantially, particularly in recent years because we have been spending more than our income, and that Scotland benefits under the Barnett formula by about 20% more per capita than England, why would it not be appropriate to look at the share of the debt in relation to the share of the expenditure that has been enjoyed? Professor Rowthorn: As a Welshman of unionist persuasion, I am sympathetic to this argument but it must be said that one argument for the Scottish nationalists is that if Scotland had been an independent country and had had the oil it would not have had a deficit. Consequently, the extra expenditure in Scotland would have been financed not by transfers from England—which is what happens; it is not from the UK but from England— but by “Scottish” oil. Q201 Lord Forsyth of Drumlean: Do you accept that argument? Professor Rowthorn: No, I am not saying I accept it. The point is that it is very difficult in these things to decide who the oil genuinely belongs to, if you see what I mean. There are different views of that and of who is entitled to the transfers. The fiscal union argument would be that you live in a fiscal union as a single state and are entitled to the transfers simply because of the fiscal union. The other argument is of course that the Barnett formula gives Scotland above average expenditures so that the fiscal transfer is above what would, say, be given to Wales. I agree that the Barnett formula applies but it is above what is given to Wales or to the north-east for that reason. You can argue that it could be on the basis of expenditure in the past but it is hard to decide what should be in or out of the expenditure. Quite a lot of what is called expenditure in Scotland is actually simple government expenditure that is allocated to Scotland on a purely per capita basis—as it is with every other part of the UK. For example, military expenditure in the Scottish accounts is simply Scotland’s per capita share of total UK military expenditure, so quite a lot of expenditure items are already done on a per capita basis. It is quite hard to decide what the true, extra expenditure of Scotland is over the rest of the UK. You can do it but it is not such a simple approach as the per capita approach, which has the great advantage of being extremely simple. The Chairman: We will come on to the Barnett formula in a moment. Lord Rowe- Beddoe? Q202 Lord Rowe-Beddoe: Can I go back to the national debt? Is there anything we can gain by looking backwards and reviewing the experience of Czechoslovakia? Professor Rowthorn: Do you mean when it broke up into two parts? When Czechoslovakia broke up, they formed a monetary union and promised to use the common currency for six months. I believe that they broke up in five weeks. Then Slovakia devalued, its economy improved and they could not really agree. Other monetary unions have broken up. The Scandinavian monetary union broke up because they came off the gold standard at the beginning of the First World War as they faced different economic circumstances. The First World War affected the three countries there differently. Once it affected them differently, they broke up the monetary union. I think that that would be one of the problems if there was a common currency between the rest of the UK and Scotland: there might be asymmetric shocks. In other words, the Scottish economy might perform very differently from the rest of the UK, in which case it might be beneficial to devalue or the opposite. We 254
Professor Robert Rowthorn—Oral evidence (QQ 188–243) have seen this in the European Union and the same issues apply. I have to say that I do not think that the differences between Scotland and the rest of the UK are similar in character or scale to those between Greece and the rest of the European Union. Q203 Lord Rowe-Beddoe: To go back to Czechoslovakia for a moment please, take it forward for me. As I understand and as mentioned in your paper, Mr Salmond is advocating that he would maintain sterling for the future. What do you think would be the position of the UK Government in that event? Professor Rowthorn: Well, the UK Government could not do anything about Scotland’s decision to maintain sterling. I heard a radio programme the other day in which several people said that Scotland could not use sterling without the permission of the UK. That is rubbish and completely false. For example, Ecuador dollarised its economy in 2000. You go to Ecuador now and everything is done with dollar bills. They are not Ecuadorian money with “dollar” on them but American dollar bills. The same is true in El Salvador, East Timor and Panama—it has been true there for 100 years. Ecuador did that unilaterally. There is no way that the United Kingdom could stop Scotland using the pound sterling. On the other hand, that does not mean that the central bank of Scotland—or whatever it would be— could print £20 UK notes. That would be counterfeiting. Q204 Lord Tugendhat: The questions you have been asked have tended to be about what the effect on Scotland would be. In the event of Scottish independence and the Scots continuing to use the pound—which you say they will—would it be in the interests of the rest of the UK or the successor state to have Scottish representation on the Monetary Policy Committee? There was a certain amount of trouble in the Scottish <strong>Parliament</strong> last week when Nicola Sturgeon said that Scotland would have a member there. Presumably, it would only have a member if the UK Government and the Bank of England agreed that it should. Do you think it would be in the interests of the UK Government and the Bank of England to have a Scottish member or would this be something of benefit to Scotland? Where do you think the benefits lie? Professor Rowthorn: It is difficult to say. It would give Scotland a voice but it might be a disadvantage because it might not be able to act independently and complain about decisions made by the committee of which it was a member. It is not clear. It is like being a trade union member on the board of a company. It is sometimes better not to be one. Q205 Lord Lawson of Blaby: It certainly is. I was rung up by the Scottish press just before the Jubilee recess. They asked what I thought about Alex Salmond and Nicola Sturgeon saying that it does not matter because sterling will be protected and they will have a Scottish member on the Monetary Policy Committee. I said that that was complete nonsense. Do you agree with that? If, as you rightly said, they decided to have sterling as their currency, that is their free and unilateral decision which they are perfectly entitled to make. But that does not give the Bank of England any obligation to have a Scottish member on the Monetary Policy Committee. It would be an extraordinary precedent if on the Monetary Policy Committee of the Bank of England you had a Frenchman, German or anybody who, if they were not a citizen of the United Kingdom—the committee relies on some Americans—somehow represented another country or foreign power. Professor Rowthorn: I agree. There are quite a lot of disadvantages in sharing sterling anyway from the Scottish point of view. One is that Scotland would lose the right of seigniorage. Governments can create money and finance their expenditure by doing so, but Scotland would not be able to do that and we could do it at Scotland’s expense. As Scotland 255
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