Revealed: where Vince Cable got his RBS plan from

The problem is, he isn't really following it to the letter.

Blogger Left Outside thought that the proposals by what the FT called "cabinet ministers" – "it's Vince Cable, everyone knows it's Vince!" – to fully nationalise RBS in order to be able to force it to start lending serious amounts of money to small and medium enterprisise sounded familiar. So they dug around the archives and found Giles Wilkes' paper for Orange Book Lib Dem think-tank Centre Forum from 2010, Credit where it's due: making QE work for the real economy.

What Vince is suggesting is basically creating an independent, government owned bank to finally start an effective policy of credit easing. Although Osborne has used the phrase before, he has been hamstrung by the desire not to do it directly, and the carrot-and-stick approach he has taken up doesn't seem to be convincing the banks to do it themselves.

Wilkes' overview of his paper laid out the plan:

"In deploying quantitative easing, the Bank may have forestalled a total collapse in our financial system. But QE has been less successful at stimulating the real economy. Now it needs reform if it is to restore the confidence needed for sustained growth. Money that is subsidizing the borrowing costs of the state should instead be helping smaller businesses and households.

"The Bank should start by targeting a high level of nominal growth until the economy is performing at its potential. This will reassure the private sector that liquidity won’t dry up in the near future, and so encourage more investment now. The second step should be for ‘credit easing’ to replace ‘quantitative easing’. The Bank’s independence of action on traditional monetary matters should be respected. But by putting taxpayer’s money at risk, QE is as much fiscal as monetary policy. So it is quite right for the government to direct the Bank to deploy the funds in the private economy, which is where it is really needed. For example, the money could help guarantee loans to small companies, or alleviate the dearth of financing for long-term infrastructure.

"With incomes stagnating and huge spending cuts in prospect, the Bank is right to ignore scare stories about spiralling inflation. It should even consider expanding the programme if the economy stays weak. What it should not do, however, is increase the size of QE without changing the way it works. It is time that politicians realised that QE is their business, and that failure to make it work properly will be their failure."

Notice anything strange, though? Vince seems to have jumped straight to step two in Wilkes' plan, skipping entirely the rather cruical first step.

Nominal growth targeting involves switching the Bank's aim from keeping inflation within 1 percentage point of 2 per cent inflation to attempting to keep nominal growth at certain level (usually around 4-6 per cent). The cruicial difference between the two being that it would allow the bank, in times of crisis (like now!) to allow higher inflation.

This matters for Cable's plan because the immediate impact of increasing the number of loans to SMEs would likely be a - temporary - burst of inflation. As companies borrow to expand production, all sorts of macroeconomic effects kick in. Young workers gain employment and move out of their parents houses (increasing the cost of housing), more people drive to work (increasing the cost of fuel), businesses invest in machinery and equipment (increasing the cost of those) and so on. This inflation would be temporary, because eventually the bottlenecks in those industries would be expanded, but it would still be felt.

Yet with the bank's mandate as it is now, it would have to respond to that inflation spike by tightening monetary policy. Interest rates go up, lending gets more expensive, and everything good is bad again. We'll see if that is how it actually plays out. Of course, the political game is, as ever, where the real action lies.

Business Secretary Vince Cable addresses employees at the BMW MINI plant in Oxford. Photograph: Getty Images

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

Photo: Getty
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Scotland's vast deficit remains an obstacle to independence

Though the country's financial position has improved, independence would still risk severe austerity. 

For the SNP, the annual Scottish public spending figures bring good and bad news. The good news, such as it is, is that Scotland's deficit fell by £1.3bn in 2016/17. The bad news is that it remains £13.3bn or 8.3 per cent of GDP – three times the UK figure of 2.4 per cent (£46.2bn) and vastly higher than the white paper's worst case scenario of £5.5bn. 

These figures, it's important to note, include Scotland's geographic share of North Sea oil and gas revenue. The "oil bonus" that the SNP once boasted of has withered since the collapse in commodity prices. Though revenue rose from £56m the previous year to £208m, this remains a fraction of the £8bn recorded in 2011/12. Total public sector revenue was £312 per person below the UK average, while expenditure was £1,437 higher. Though the SNP is playing down the figures as "a snapshot", the white paper unambiguously stated: "GERS [Government Expenditure and Revenue Scotland] is the authoritative publication on Scotland’s public finances". 

As before, Nicola Sturgeon has warned of the threat posed by Brexit to the Scottish economy. But the country's black hole means the risks of independence remain immense. As a new state, Scotland would be forced to pay a premium on its debt, resulting in an even greater fiscal gap. Were it to use the pound without permission, with no independent central bank and no lender of last resort, borrowing costs would rise still further. To offset a Greek-style crisis, Scotland would be forced to impose dramatic austerity. 

Sturgeon is undoubtedly right to warn of the risks of Brexit (particularly of the "hard" variety). But for a large number of Scots, this is merely cause to avoid the added turmoil of independence. Though eventual EU membership would benefit Scotland, its UK trade is worth four times as much as that with Europe. 

Of course, for a true nationalist, economics is irrelevant. Independence is a good in itself and sovereignty always trumps prosperity (a point on which Scottish nationalists align with English Brexiteers). But if Scotland is to ever depart the UK, the SNP will need to win over pragmatists, too. In that quest, Scotland's deficit remains a vast obstacle. 

George Eaton is political editor of the New Statesman.