THE Fiscal Commission’s first report is a welcome addition to the debate leading up to the independence referendum.
It outlines some of the key economic and financial choices that need to be made to design a robust macroeconomic framework. These choices relate in particular to fiscal policy, monetary policy and financial stability
On monetary policy the commission approves of the Scottish Government’s current proposal to retain sterling and have a shared currency with the rest of the UK. This may well be the best option available but it does leave the rest of the UK with a strong hand in how it is to be achieved. In particular, it calls into question Scotland’s ability to run an independent fiscal policy from that being pursued in the rest of the UK.
A further complication on the fiscal policy side, ably highlighted by the commission, is how to manage the impact of volatile North Sea receipts.
Not surprisingly the commission recommends the creation of an oil fund, for future generations. However, it also recognises the difficulty of creating such a fund when Scotland would, like the UK, inherit a large fiscal deficit.
It recognises that it may be a medium-term goal for such a fund to be created, although it largely avoids discussion of the implications of the decline in such receipts that the OBR currently forecasts. However, as this is the first of a number of papers from the commission it would be wrong to expect answers to all the difficult questions involved in any transition.
There is one area where the commission’s report is currently weak, its description of the performance of the Scottish economy. Much of it mirrors the Scottish Government’s own briefings. As such, it appears inconsistent in places. For example, it claims Scotland has a long-term record of economic underperformance versus the UK and yet, despite this, it also claims Scotland has a standard of living and labour market performance on a par with the rest of the UK. The two views seem incompatible..
• Professor John McLaren is an economist with the Centre for Public Policy for Regions