ALEX Salmond used the publication of the independence white paper to declare that Scotland “will retain the pound” after secession, with control of interest rates and monetary policy remaining with the Bank of England.
The deal would come about as a result of “enlightened self-interest” between Edinburgh and London, Mr Salmond argued, saying that maintaining a free trade area across the UK was based on “reason and common sense”.
The First Minister said England would be acting against its own interests by rejecting a new currency-sharing deal with Scotland after independence.
However, two leading researchers warn that, by suggesting that Scots could “choose a different arrangement in the future”, a deal to keep the pound would be doubted by markets and investors – and could lead to its collapse.
Writing below, Dr Angus Armstrong and Dr Monique Ebell, of the National Institute of Economic and Social Research, declared: “If citizens on either side of the Border have no guarantee that the sterling union will continue to be the preferred option in future, then the arrangement is fragile because of this possibility of future changes of heart. Suggesting that the currency union may not be permanent leaves the system exposed. An example of this is the Czech and Slovak currency union after the amicable divorce in 1993. Because the Czech and Slovak currency union was conceived of as temporary, it lasted only five weeks.”
Mr Salmond declined to offer a cast-iron guarantee that the currency sharing deal was a certainty yesterday.
With UK ministers having already described the idea as “highly unlikely”, a Downing Street spokesman added yesterday. “What I would say is that respecting the outcome of the referendum is a completely different thing to agreeing to whatever Alex Salmond announced at the press conference,” the spokesman said.
Pro-independence supporters on the left also repeated calls for Scotland to back a separate currency, saying it would give the country more flexibility to act independently.
Mr Salmond told a press conference in Glasgow: “While it is true that the rest of the UK is Scotland’s largest trading partner, it is also true that Scotland is the UK’s second largest trading partner. It is very much true there would be a massive hole in sterling’s balance of payments [if Scotland’s oil and gas resources no longer contributed] and it is also true that if we take on the liabilities built up by Alistair Darling and George Osborne over the last few years, we are entitled to a share of the assets.”
Earlier, Deputy First Minister Nicola Sturgeon also warned that if a currency deal was not agreed, Scotland could refuse to take on a share of the UK’s £1 trillion national debt. She said: “The pound is as much Scotland’s as it is the rest of the UK’s. The UK government, in the wake of a Yes vote, will want Scotland to take its fair share of liabilities. But that only works if we also get our fair share of assets.”
Bruce Beveridge, president of the Law Society of Scotland, said: “It is difficult to understand the most likely currency arrangements if the Scottish people were to vote for independence next year. It is hard to have a proper debate against a background of uncertainty on such an important issue as this.”
Control over all tax and spending ‘will better reflect Scottish priorities’
The white paper section on the economy acknowledges that “as with most developed countries – including the UK – Scotland is currently running an estimated fiscal deficit, which means that revenues from taxation fall short of public spending”.
It adds that, as it recovers from the financial crunch, “Scotland will inherit a challenging fiscal position that will require careful stewardship in the first years immediately following independence”.
But, it says that control over all tax and spending will better reflect “Scottish priorities” and will also allow the government to “improve the Scottish economy – by, for example, better linking our welfare and tax system”.
Growth will then help to fill in Scotland’s deficit, it argues.
The white paper provides an example of how a future SNP government in charge at Holyrood after independence might then act. It would reduce defence and security spending (compared to current UK levels), end the married couples’ tax allowance, cancel Westminster’s “Shares for Rights” scheme and provide a “streamlined” system of international representation.
It claims these measures would save £600 million in the first year. It argues that, in its first budget, this would enable it to keep Scotland’s “free” services – such as free personal care and free tuition for Scottish domiciled students – abolish the “bedroom tax”, uprate the state pension, cut energy bills, increase childcare, reform benefits, increase tax allowances and have enough left to ensure 0.7 per cent of GDP is distributed in aid.
Within the first term of an SNP government, the white paper claims it would then further increase childcare, halve air passenger duty and provide a timetable to cut corporation tax.
Exact decisions on personal tax, however, will have to wait until the 2016 Scottish election, when it will be up to political parties to set out their plans.
On the financial architecture of the new country, the SNP says it would want to keep the pound and the UK-wide monetary system.
The white paper restates the position set out in recommendations from its Fiscal Commission that to retain sterling as part of a formal monetary union with the rest of the UK is the best option.
“Under such an arrangement, monetary policy will be set according to economic conditions across the sterling area, with ownership and governance of the Bank of England undertaken on a shareholder basis.”
The white paper insists that a monetary union would still allow for “significant differences in fiscal and economic policies”.
Despite warnings from the UK government that such an agreement is “highly unlikely”, the white paper argues that the deal would be in the UK’s best interests, given the strong trade links between the two nations.
However, the document does accept openly that voters could decide after independence to pick a different currency if they so wish.
Within that framework, it says that Scotland would have its own financial regulator to keep watch on the safety and soundness of financial institutions, and to oversee financial products and the protection of consumers.
The paper says that the market for financial products, such as pensions, loans and bank accounts, which is highly integrated across the UK, would largely continue as it is. It says that the Scottish Government would also abide by fiscal rules and would sign an agreement with London on borrowing and debt levels, in order to ensure stability in the currency zone.
It argues: “Given Scotland’s healthier financial position, we anticipate that Scotland will be in a strong position to deliver this.” Within that, it would still have “full autonomy” to tax and spend “responsibly”, the white paper claims – pointing to how Luxembourg and Belgium, part of a currency union, have had different rates of VAT.
On tax reform, the white paper backs the creation of a simpler system which, it claims, would save £250m a year in tax avoidance.
However, it makes no mention of the one-off costs associated with setting up the infrastructure of a new state. A leaked paper written by finance secretary John Swinney last year put the cost at £600m to run such a new system. But the paper says that “we will create a tax system that is simpler and costs less to administer than the current UK system”.
And on debt, the white paper declares that Scotland’s share would amount to between £100 billion and £130bn.
As a proportion of GDP – gross domestic product, which is boosted in Scotland due to oil flows – the document says this is “less than the debt of the rest of the UK expressed in the same terms”.
The white paper does not accept independent analysis which states that the cost of future borrowing to pay for Scotland’s deficit would be higher than that paid by the UK.
It adds that Scotland is “well placed to have a top credit rating and government borrowing will be undertaken in an affordable and sustainable manner”.
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