Keeping the pound an ‘odd vision’ for Scotland

He was reacting to finance secretary John Swinney’s revelation that an independent Scotland would keep the pound for the foreseeable future and that the Bank of England would act as its central bank and lender of last resort.

On a visit to Edinburgh, Mr Balls said such plans for a monetary union between Scotland and the rest of the UK would risk jobs and investment.

He said: “If Scotland is in sterling, then the Bank of England must be the lender of last resort. But there is no way that the UK taxpayer could allow the downside risk of the Bank of England playing that role without very clear, probably tougher, offsetting restrictions on tax funding, borrowing and regulation.

“If not, an independent Scotland could decide to do things in a more risky way, assuming the Bank of England was there to bail it out. So, compared with the status quo, I think you end up in regulation in monetary policy and fiscal policy, with less implements and greater external strictures and requirements, and I just don’t see how does that relate to independence?

“I find that a very odd vision, but that seems to be what they are proposing.”

He went on: “Why do Alex Salmond and John Swinney want to have great external control in an independent Scotland? It is a question people may be asking in Greece at this moment as well.”

His argument was supported by shadow chief secretary to the Treasury Rachel Reeves, who accompanied Mr Balls on his trip. She said: “It seems like a very odd time to set up a new sterling currency union with a smaller country – which Scotland would be compared to the rest of the United Kingdom – having its interest rate set by a different country for a rate that would not necessarily suit them and having their fiscal policy constrained.”

Their remarks came on the eve of the publication of a paper from the National Institute of Economic and Social Research, suggesting an independent Scotland would be more constrained on economic policy than it would be as part of the UK.

The report, by Dr Angus Armstrong, found it would be “sensible” to retain sterling, but said that course of action would have its own problems.

It argued it was “doubtful” if the Bank of England would extend lender-of-last-resort facilities to Scottish institutions. Dr Armstrong said fiscal balances would be volatile because of heavy reliance on oil, and that Scotland would be open to the threat of default.

His report said: “With a pro-rata transfer of existing UK public debt, Scotland would enter independence heavily indebted, with no insurance from fiscal risk sharing or fiscal transfer mechanism with the rest of the UK.

He added that political union meant risks could be shared by the four parts of the UK.

Keeping the pound an ‘odd vision’ for Scotland – Balls