A Welsh National Debt Must Be to Our Own Bank – Ian Jenkins
By Dr Ian Jenkins
Independent Researcher with Welsh Monetary and Economic Reform organisation Arian Cymru
(Please download PDF here)
The reactions of the Welsh Assembly Government to the first part of the report of the Silk Commission on Devolution in Wales, and the seeming cross-party adoption of its recommendations for borrowing powers for WAG, should send alarm bells ringing for anyone in the Principality possessing even a passing acquaintance with the calamitous history of public borrowing by nations which, like Wales, lack monetary sovereignty.
The statement of 2nd February this year by Welsh Finance Minister Jane Hutt makes clear that the WAG’s ‘priorities’ in the wake of Silk 1 are to secure ‘devolution of borrowing powers to finance capital investment and to manage short term budgetary fluctuations arising from any tax devolution’ and also, possibly, ‘early access to borrowing powers, ahead of any tax devolution, to finance specific infrastructure projects, in line with the commitment in the joint statement on funding reform issued in October 2012’. The joint statement states that Westminster accepts the case for devolved borrowing powers for the WAG for financing infrastructure projects, ‘subject to an appropriate independent stream of revenue being in place to support it’.
Yet the statement also suggests that the UK and Welsh Governments should ‘continue to explore the options for financing specific infrastructure projects, including the case for early access to borrowing powers in anticipation of a future independent revenue stream’: quite how this would be financed is never explained, only that any such power should work within the UK Government’s need to live up to its ‘fiscal mandate’, a phrase which has proved enigmatic at best since its first airing in Osborne’s budget speech of 2011, but which seems to have its foundations in Osborne’s ideological deficit psychosis (the issue whether 36.1% of the national vote constitutes a ‘mandate’ for anything is for another day). This frontloading of borrowing powers ahead of fiscal devolution is only one of the ominous spectres haunting this WAG project and we may be heading into a situation where, to paraphrase Santyana, we are doomed to repeat history by ignoring its lessons.
Yet alternatives to this headlong rush into the perilous embrace of the bond markets exist and there is a model which, despite its international successes, is totally ignored in the UK context: public banking. Public banking is vital to the successes of the more respectfully-named BRIC nations (Brazil, Russian, India and China), as well as of European economic powerhouse Germany through the publicly-owned Landesbanken and the state-owned Bank of North Dakota in the US. The public banking model is in essence quite simple: a nation such as Wales (as well as its local government units), could a use a portion, or all, of its budget as the depository base for a bank which has as a sole mandate investment in national infrastructural projects and in the local SME sector: taking advantage of the ability of banks to create liquidity through the issue of credit via the process known as fractional reserve banking.
A public bank allows the region or state to overcome the shortcomings of the private banking system, wherein perverse incentives and lunatic risk models have turned banks away from investment in the ‘real’ economy of production, infrastructure and research and development, and towards lending for asset price inflation, derivatives gambling and bubble creation, as can be observed in the crisis in the real estate sectors of the UK and US.
Public banking also has the enormous advantage that profits received through arbitrage on loans, the difference between the bank’s borrowing rate or depositor rate and the rate at which it makes loans (also known as the ‘spread’), after overheads are met, comes back as a dividend to the bank’s primary shareholder: the state. This system uses the credit creation function of banks for the good of society and to meet the needs of the broad majority, instead of perpetuating the current extractive system of private banking wherein the profits on loans to public bodies are paid out in dividends to an already wealthy class of private shareholders or in obscene bonuses to bankers, often subsequently being offshored or used as a base for further rent-seeking.
The 2011 publication Public Financial Institutions in Europe, produced by the European Association of Public Banks provides ample evidence of European public banking institutions having been instrumental in saving national and local government large sums on loans for infrastructural investment, as well as detailed examples of the success of public banking models in stimulating SME sectors. At the present time such models seem to be a long way from the national conversation in Wales: it is only to be hoped that this will be remedied in good time by a party with the vision and courage to think outside the current neo-liberal policy box; otherwise the danger of Cardiff becoming the Athens of the North, but not in the positive Edinburgh Enlightenment sense, will continue to hang over our national future.