Independent Scotland ‘needs strict spending limit’

AN INDEPENDENT Scotland will have to impose strict limits on spending and agree borrowing curbs with the rest of the UK to avoid the wrath of the financial markets, advisers to the Scottish Government have said.

The advice also states that austerity will continue to bite “irrespective” of whether the country votes Yes or No next year.

However, the Fiscal Commission, set up by the SNP government last year to study the economics of independence, said the restrictions would be outweighed by the “flexibility” of independence, which would allow Scottish ministers to pick a way through the financial crisis facing western countries.

The 221-page document, commissioned by the Scottish Government, recommended that an independent Scotland should keep the pound and the Bank of England, and sign a pact with the UK on financial stability.

Such policies would provide a mix of “autonomy, cohesion and continuity”, chairman Crawford Beveridge said yesterday. The pro-independence former Scottish Enterprise chief insisted: “Scotland has the clear potential to be a successful independent nation.”

Mr Beveridge said yesterday there had already been discussions with the Bank of England on it becoming the central bank of an independent Scotland, stating that officials saw it as a “perfectly sensible” approach to take.

However, UK ministers claimed yesterday that the SNP plan would leave Scotland with little control over the Bank of England and, by extension, monetary policy, after independence. Launching the Westminster government’s own paper on the implications of Scottish independence, Scottish Secretary Michael Moore said: “The simple reality is that the Bank of England would remain a creature of the UK parliament and its law-making powers.”

The commission said yesterday it would be in the interests of both sides to reach agreement on the arrangements, but some experts warned Scotland could have to accept tight constraints to do so.

Professor Brian Ashcroft, of the Fraser of Allander Institute at Strathclyde University, said: “It will be up to the Scottish Government to negotiate a deal. That will clearly come at a price. It will include a fiscal stability pact which could tie down the room for fiscal manoeuvre quite significantly.”

The economic underpinning of an independent Scotland is crucial territory in the referendum debate, with pro-independence figures attempting to reassure voters, markets and investors about their plans.

The report yesterday estimated that Scotland would have to shoulder a £126 billion share of Britain’s national debt – with annual interest payments of £5.7bn.

There would, therefore, be a pressing need initially to placate the money markets and to show that the country had financial credibility.

“An independent Scotland will need to establish its credibility on international financial markets to minimise its borrowing costs. This could be achieved by adopting a strategy for reducing public sector debt, and an effective budget constraint for the public finances,” the report said.

As well as the backstop of the Bank of England, a formal deal would have to be agreed with the UK government in which Scotland committed itself to to pay down debt and curb borrowing. These would include “explicit debt targets and limits”, the commission said.

The cash squeeze would also mean that, to begin with, North Sea oil cash would be required “to fund current public services and reduce public sector borrowing”.

Over the longer term, the country would have to show it was prepared to slash its reliance on debt. Measures could include plans to “boost the scope of onshore tax revenues” and efforts to “reduce pressures on expenditure” in other areas.

An independent Scotland, it said, “faces similar demographic challenges to the UK as a whole and will also have to manage the projected long-term decline in North Sea production and tax receipts”.

The authors note that “Scotland and the UK will face a challenging fiscal envelope for at least the next five years irrespective of the constitutional framework” chosen in 2014.

But Scotland could use its powers to act – for example, by changing the North Sea tax regime to boost recovery rates, or by putting in place new immigration rules to lure more highly skilled people to Scotland.

The report also recommended the creation of a “Stabilisation Fund” to help the country cope with years when oil revenue was low. This would be funded from years when revenues were high.

Finance secretary John Swinney said last night: “This important work by the Fiscal Commission Working Group proves the necessary preparations are taking place to ensure an independent Scotland is ready for the challenges ahead.”