Scottish independence: The big economic questions that need to be answered - John McLaren

With a second referendum date announced that is only 16 months away, the SNP faces some tough economic questions over the potential impact of independence.

First on the list - why would leaving a close economic union with the UK not have a similar, negative, impact as the UK’s leaving the EU? In other words, how do you persuade people that comparable events would have diametrically opposed outcomes? Not an easy question to convincingly answer as some sort of border between Scotland and England seems inevitable and new borders mean extra costs. Some of these will be offset by rejoining the EU but the net impact is still likely to be negative, given current trading patterns. Firms who do business, in any form, with the rest of the UK will be particularly interested in what happens here.

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Second up is the currency issue - will it be uniquely Scottish, sterling or the euro? I add the last, little discussed, option as the EU may look askance at an applicant that wants to prolong a currency sharing situation with a non EU country rather than move to one with the EU. Even without that complication the currency issue is a difficult one to provide clarity over as it is so complicated. For example, if we adopt a form of sterlingisation, does the Scottish Government have any influence on or control of monetary policy?

There are huge economic questions surrounding Scottish independence. Picture: Getty Images

Third, how to deal with the fiscal deficit? As long as exceptional circumstances persist almost every country will have a large fiscal deficit but as things return to normal so the size of that deficit will be examined more closely. The EU will need to decide what is a “reasonable” deficit and markets will be interested in how much to charge for borrowing.

It seems clear that the inherited fiscal position will be unsustainable, as the SNPs Growth Commission report acknowledged. The question then is how to adjust. The Commissions option of a form of mild austerity over a decade or so seems less credible now. Instead, substantial cuts to areas of spending (eg defence) along with some tax increases may be the best way forward. But, again, not an easy question to answer.

The SNP’s first clarifying paper was an intriguing start to providing some answers. It dug down into some of the reasons that small countries may be more economically successful, although the focus was very much on labour market based reforms and it was not forthcoming on the higher taxes needed to fund such schemes.

In the end, regardless of all the reports that are published, the electorate will need to base their decisions on informed hunches as no definitive answers can be given on any of the big economic questions. At best a credible way forward can be set out, at worst a wish list of ideal outcomes.

The real answers will be the result of a series of post referendum negotiations between the Scottish Government and the remainder of the UK, along with the EU. Brexit negotiations were pretty ugly, these could be too, and neither side will get what it really wants, but instead what is tolerable to both.

John McLaren, economist, Scottish Trends


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