Gavin McCrone: Count it before you spend

A precendent for keeping a UK monetary union was set when Ireland became independent in 1922. Scotland could opt out of the euro, much as Sweden did, while staying in the EU. Picture: PA Wire
A precendent for keeping a UK monetary union was set when Ireland became independent in 1922. Scotland could opt out of the euro, much as Sweden did, while staying in the EU. Picture: PA Wire
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What currency would be in your purse in an independent Scotland? And what if the UK went to war? It all needs to be sorted out before a vote is held

DAVID Cameron’s intervention in the independence debate has ensured that this issue is now going to be centre stage until the proposed referendum takes place. It is rather late in the day. Up to now, Westminster and much of the public in England have been sleepwalking towards a constitutional crisis and they are only now beginning to realise that the disintegration of the United Kingdom is a real possibility. The media and the ease with which different editions are produced for different parts of the UK must take part of the responsibility for this. While devolution and an independence referendum have constantly featured in the press in Scotland, they have seldom featured in England, even in the same newspapers.

We can now expect a great deal of debate. The UK government’s White Paper argues that, since under the 1998 Scotland Act constitutional issues are a reserved matter for the UK parliament, a referendum set up by the Scottish Parliament could be subject to challenge in the courts. This would be an appalling outcome for all concerned. The two governments must therefore put aside their differences and agree so that a power can be given to Scotland by the UK parliament for such a referendum to be held. Mr Cameron wants a quick poll with one question – in or out. Alex Salmond has chosen the autumn of 2014 and wants two questions – one on whether the devolved Scottish Parliament should have increased powers (maximum devolution or “devo max”) and the other on whether Scotland should become an independent country.

On the referendum itself, both governments agree that vote should be by people resident in Scotland. The UK White paper says nothing about minimal percentages, such as were introduced by the Cunningham amendment to the devolution bill of the 1970s. Although the 1979 referendum produced a small majority for devolution, an insufficient percentage of the electorate voted, so it could not be implemented. This resulted in much controversy. But on an issue of such enormous importance, not only to Scotland but to the rest of the UK, it would surely be extremely unsatisfactory if either independence or devo max were to win by a tiny margin, say 50.5 per cent on a 30 per cent turnout. A low turnout is perhaps very unlikely this time, but a close result with a tiny majority, as happened in Quebec when separation was rejected, is perfectly possible.

The coalition government clearly regards devo max as a fall-back position for Alex Salmond, if he does not win a vote on independence. With only some 30-40 per cent likely to vote for independence on recent polls, it is probably true that more people would vote for devo max, seeing it as some sort of compromise between independence and the status quo. But given Alex Salmond’s success in the recent parliamentary election after the polls had predicted a substantial lead for Labour, the unionist parties would surely be unwise to assume that independence would be rejected on a straight vote. Bill Jamieson has recently said in this newspaper that if the unionist parties really want to preserve the UK, devo max, despite its many difficulties, should be a fall-back position for them too.

If the status quo is rejected, independence would be the simpler of the two outcomes, but even it would involve negotiations on the national debt, on dividing the North Sea, on the currency to be used by Scotland, on defence bases and the future of Trident, on immigration issues, on publicly-funded pensions and on the European Union. George Osborne is recently reported in this newspaper as saying that an independent Scotland might not be allowed to keep the pound, might have to join the euro and would no longer have an influence on UK fiscal or monetary policy. The Scottish banks, the Treasury is reported as arguing, would no longer be able to print bank notes. There are obviously going to be a lot of scare stories, not all of them in the end helpful to the unionist cause. So it is worth untangling some of these arguments.

If Scotland was a member of the EU, I do not think it could be forced to join the euro, despite the expectation in the treaties that all member states would eventually join. Sweden, which is an EU member state, held a referendum in which euro membership was turned down and no-one is going to do anything about that. What about retaining the pound? When the Republic of Ireland separated from the UK in 1922, it remained in the UK monetary union till the end of the 1970s, when it joined the European Exchange Rate Mechanism. However, there was an Irish central bank, which issued its own notes. These were interchangeable with Bank of England notes in Ireland. What this meant technically was that Ireland had its own currency, but chose to link the Irish punt to sterling. This meant that there was no freedom of monetary policy because interest rates were set by the Bank of England. The Irish government issued its own bonds, but its fiscal policy was very tightly constrained by the need to maintain the monetary union.

Devo max has never been defined. Scotland would, however, remain part of the UK with its MPs at Westminster. It is not clear how far it would go beyond the measures presently in the Scotland Bill. But the assumption seems to be that, while monetary union would remain, the fiscal union and the transfer union (whereby expenditure is based on some view of need and the stronger parts of the country support the weaker) would both end. Virtually all taxes and responsibility for public expenditure would be devolved with the UK continuing to handle only defence, foreign relations and most of macroeconomic policy.

The Bank of England would continue to set interest rates and borrowing by the Scottish Government would have to be constrained to ensure that UK bonds retained their credit rating. While the Scottish Government might perhaps assume responsibility for all personal and property taxes, VAT could not be different from the rest of the UK under EU rules and I would expect major difficulties to arise, with strong objections from other parts of the UK, if it were suggested that corporation tax rates were to be devolved. Then there would be questions about whether the national debt would be divided and whether the UK government could be expected to bail out the Scottish Government, if it was in difficulty.

On the expenditure side, everything would be devolved apart from defence and foreign relations. Welfare expenditure is the largest single category that is not devolved at present. But are differences in levels of welfare – state pensions, unemployment and the various benefits – compatible with being in the same country? The other countries of the UK would certainly have views about that. And as for defence, presumably the UK defence installations, including Trident, would remain. But the UK government might decide to take some action abroad to which the Scottish Parliament was opposed. How would that be handled? Since the UK prime minister would still be responsible for the whole UK, the Scottish Parliament would have to accept UK policy.

Sorting out all of these issues and ensuring that they are fully understood by those who will vote is going to take time, so that whatever Mr Cameron says, I do not expect the referendum to take place any earlier than October 2014, the date chosen by Alex Salmond. What worries me most is that as the debate continues, it could become not only increasingly intense but acrimonious. I give politicians the credit on both sides of not wanting that to happen, but they might find it difficult to control. There are plenty of people both in England and in Scotland who might make it so. Acrimony would be damaging to both countries but especially to Scotland. It could seriously affect not only investment but the tourism business, since for both Scotland is closely linked with England and geography ensures it will remain so, whatever the result of the referendum. We must ardently hope that does not happen.

• Gavin McCrone was formerly chief economist at the Scottish Office