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Independence issues: Financial, economy & currency

The financial services industry would certainly be affected by a currency change. Picture: AFP/Getty

The financial services industry would certainly be affected by a currency change. Picture: AFP/Getty

Each side has produced figures to support its claims about Scotland’s future, but neither side can definitively say what is going to happen, writes Alex Massie

If there is one thing everyone agrees upon in this referendum campaign it is the need to establish the facts. Facts are sacred. Facts are the compass by which we navigate our way through the political forest. You can rely on facts.

Except you can’t. For there are very few facts, only a multitude of interpretations. Your intuition, your judgement is your only guide and, in the end, you are on your own. Nowhere is this more abundantly the case than in the claims and counter-claims made about Scotland’s economic prospects both now and after independence.

Will you be better off after independence or will you continue to receive a “Union dividend” by voting No? The truth – though neither campaign will let you in on it – is that no-one knows. Yes Scotland and Better Together have promised you wildly different futures but their campaign claims, ultimately, are exercises in best- and worst-case guesswork. They are only two of the many possible futures contingent upon a host of decisions that would be made in response to circumstances that, for now, can only remain a matter of conjecture.

This is not to say that everything either campaign has done – all that number-crunching, all those leaflets plastered with smart and shiny statistical infographics – has been useless, merely that expecting either to give you “the facts”, let alone “the truth” is to expect more than they can reasonably, even possibly, deliver. Indeed, a sceptic might recall Mark Twain’s suggestion that in any argument it is important to “Get your facts first, then you can distort them as you please”.

Everyone agrees – on this at least we can be modestly certain – that Scotland is one of the wealthiest parts of the United Kingdom. All official statistics point to it trailing only London and the south-east of England. There are worse places from which to begin a journey towards independence. The Scottish Government insists that, once North Sea oil revenues are included, Scotland contributes more in UK revenues than she receives in UK public spending. She has done so, St Andrews House claims, for each of the last 33 years. Over the last five years, Yes Scotland argues, “our public finances have been stronger than the UK by a total of £8.3 billion – that is almost £1,600 for every person in Scotland”. Be that as it may, Better Together responds, “Scotland benefits from public spending per person that is around 10 per cent higher than the UK average” and the “long-term financial benefit of staying in the UK is worth up to £1,400 a year to each person in Scotland”.

Who is right? That, like so much else, is a test of faith. If your instincts lean Yes, you are more likely to believe the Scottish Government; if not, the unionist argument is likely to prove more seductive. And if you don’t know who to believe, there is no-one who can help you.

If that’s unfortunate, so is the lack of clarity over which currency an independent Scotland might use. Are George Osborne and Ed Balls bluffing when they say Westminster could never endorse a formal currency union that made the Bank of England last resort to the banks of a foreign country? Or would “common sense” prevail once the referendum’s done and won? No-one can be wholly certain, I’m afraid.

We can say more confidently, however, that so-called sterlingisation – an option Alex Salmond dubs “quite attractive” – is the most probable, if still elusive “Plan B” for the Scottish Government. That would see Scotland continue to use the pound, albeit in an unofficial, informal fashion. The country would have no central bank and no lender of last resort. It is, however, an option the First Minister’s own fiscal commission deemed unattractive.

A formal currency union or, alternatively, sterlingisation, might not on the face of it affect the lives of “ordinary hard-working Scots”. The pound in your pocket would remain the pound in your pocket. But it would most probably have an impact on the country’s financial services industry. Edinburgh, in particular, might have cause to be anxious about sterlingisation. The upside, from a nationalist perspective, is the possibility of reneging on past assumptions about sharing the UK’s debt and beginning independent life with no national debt.

If a formal currency union requires Westminster’s agreement (however galling that prospect may be) it also raises the prospect of a sharply diminished definition of independence. Interest rates would be set by the Bank of England and London would probably insist upon strict budgetary rules that would limit any Scottish Government’s room for manoeuvre. Cynics might even dub this “independence within the UK”.

In any case, it seems probable that London would cast some shadow over an independent Scotland. For instance, current SNP policy is to undercut whatever rate of corporation tax is levied by Westminster. Effectively, Westminster would set the Scottish rate of corporation tax. As regards personal taxation, the Scottish Government says it has no plans to increase the burden of tax paid by individual Scots. No government can tie the hands of its successors, however.

But some circles can be squared. That is, it is possible for Scotland to be, relatively speaking, in a better fiscal position than the UK as a whole – and for it to be true, as the Institute for Fiscal Studies suggests, that an independent Scotland, while economically viable, would need to raise taxes or cut spending to balance its budget.

This game of numbers, however, lies at the heart of the referendum campaign. The SNP is keenly aware of the need to establish its economic credibility as a platform from which the race to independence can be launched. For their part, Unionists must straddle a line between noting the advantages of Union and fostering the impression that Scotland, somehow, is too poor or too hopeless to survive independence. Not a banana republic, but a shortbread tin economy.

In the end, financial statistics can only take you so far. Numbers may seem more solid than words and the thirst for concrete certainty is understandable, but this is less an argument about the economy than one about which set of numbers you are prepared to entrust with your faith. Facts, even if you can find them, may not be able to help you.

What the polls say - John Curtice

The Economic Case for Yes - John Swinney

The Economic Case for No - John Boyle

Currency: The Case for Yes - Prof David Simpson

Currency: The Case for No - Prof Ronald MacDonald

Financial Perspective - Matt Qvortrup

 

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