Scottish independence: Call to ‘settle’ on currency

THE UK government must end the uncertainty over an independent Scotland keeping the pound before the referendum is held, leading economists have warned.

First minister Alex Salmond has stated his preference for a currency union. Picture: PA
First minister Alex Salmond has stated his preference for a currency union. Picture: PA
First minister Alex Salmond has stated his preference for a currency union. Picture: PA

The outlook for Scotland after independence was put under the spotlight in a National Institute of Economic and Social Research (NIESR) paper published in Edinburgh yesterday, with contributions from a range of leading economists.

The “sterling monetary union” proposed in the SNP’s white paper suggests the Bank of England could be shared by the Scottish and UK governments. But the Treasury, while not ruling it out, has indicated such a union is unlikely to be agreed with Scotland after independence – and last night it refused to shift from this position.

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Dr Angus Armstrong, head of the NIESR’s macroeconomics and finance group, said that stance meant there was a “degree of uncertainty over this most important issue” which needed to be clarified.

“You want this, one way or another, settled,” he said. “We need to have a discussion about this. And the UK is able to have this discussion – it could say yes or no to a formal union.

“Having this degree of uncertainty over this most important issue, which could be clarified – either one way or the other, it could be clarified – I don’t think it’s helping people.”

A joint paper by Dr Armstrong and economist Professor Monique Ebell warned another financial crash or “shock” would place any currency union in jeopardy.

It said Scotland would be saddled with a national debt of about £146 billion from the UK in the event of a Yes vote, and this could jeopardise SNP leader Alex Salmond’s plans for a “sterling zone”.

The concern is that a newly established small nation could not handle a shock to its economy like the last financial crash, and even if a monetary union was agreed, it would be a “one-sided and unfair” set-up, slanted in favour of the dominant UK’s interests, the experts warned.

Scotland would cede control over monetary policy, such as interest rates. Fiscal policy – tax and spending levels – would also be “explicitly constrained” under such a set-up, Prof Ebell said .

The paper said the UK’s public debt was expected to reach about £1.7 trillion by the end of 2016 and Scotland’s share of this would be some £146bn.

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It said this would leave Scotland with a healthier balance sheet than the rest of the UK, with an 81 per cent ratio of debt against the size of the economy as a whole. The UK figure is about 104 per cent, but it has the reputation and history of meeting its debts.

According to the NIESR, the fear is that a small country like Scotland – similar to peripheral eurozone countries – would find markets less willing to fund its borrowing in sterling, and debt and interest rates could rise rapidly.

Prof Ebell warned Scotland was unlikely to “wield any influence over monetary policy in a monetary union” with the rest of the UK. “Effectively, Scotland would also be ceding control of monetary policy within a monetary union,” she added.

This meant interests rates would remain in the hands of London.

Prof Ebell said monetary unions generally provide all partners with a degree of “mutual assurance”. But she added: “It’s very difficult to see Scotland being able to bail out a country the size of the UK – the reverse is a more distinct possibility.”

Bank of England chief Mark Carney warned last week in a speech in Edinburgh that Scotland would have to cede “some sovereignty” over tax and spend in a monetary union.

Prof Ebell said: “In a country with high debt, if a large major shock comes along, markets might begin to doubt the political will to impose the kind of austerity that would be necessary – and might destabilise that currency union.

“And any doubts about a currency union can quickly become self-fulfilling prophecies.”

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Dr Armstrong said: “With the level of debt we think would be a reasonable split, we think that would mean, in an independent Scotland, a form of currency union would be vulnerable.”

He said the UK would have at least nine seats out of ten on the Bank of England monetary policy committee, which sets interest rates.

“I think you would see the rest of the UK, as we saw in the European Union … the big countries tend to ignore the rules.

“Unfortunately, and it’s very unfair but has been observed in the European Union, small countries have to obey them. Big countries like Germany and France were the ones who broke them. It wouldn’t surprise me if the rules – if there was an agreement – were very one-sided in the way they’re applied.”

Opposition to the proposed sterling zone is building south of the Border.

Andrew Tyrie, chairman of the Commons Treasury select committee, warned this week that a currency union would create “resentment” on both sides of the Border and so drive Scotland and the rest of the UK further apart after independence.

“It is just such resentment that we must do everything to avoid in the search for a stable economic and political relationship between all of us on both sides of the Border,” he said, as he recommended the UK government should rule out a formal currency union.

Last night, a Treasury spokesman insisted its position had not changed since Chancellor George Osborne’s recent appearance before the House of Lords economy committee. “It’s extremely unlikely that a currency union would be agreed,” he said. “But we’re not going as far as ruling it out at this stage.”

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Finance secretary John Swinney said the papers published yesterday showed Scotland was in a stronger fiscal position than the rest of the UK right now. He added: “On any calculation, an independent Scotland will have lower levels of debt than the rest of the UK and the firm foundations we need to build a stronger and fairer economy.”

But he said: “The powers of independence are essential if we are to redress the economic balance and ensure Scotland’s economy grows at the levels other small European nations have experienced.

“As these studies confirm, an independent Scotland will be able to take different policy and spending decisions that can change the path we are currently on as part of the UK.”

Blair Jenkins, head of the pro-independence Yes Scotland campaign, said the report showed “by whatever measure is used, Scotland has got what it takes to be a successful and prosperous independent country”.

But Blair McDougall, campaign director for the pro-UK Better Together group, said: “Expert after expert is lining up to point out the enormous challenges we would face if we lose the financial back-up of being part of one of the biggest economies in the world.”

Earlier state pension

THE prospect of Scots retiring a year earlier than UK citizens after independence would cost £750 million and is likely to mean a hike in taxes.

The UK government has set out plans to raise the retirement age for the state pension to 67 in 2027. Deputy First Minister Nicola Sturgeon has indicated Scots could still qualify at 66 if there is a Yes vote in the referendum. But a report by Stirling University academics indicates this will mean a rise in the government’s pensions bill and probably tax rises.

“Suppose that Scotland delays the rise in the SPA [state pension award] to 67 for 12 years until 2039,” it states. “The cost of this policy is fairly constant on an annual basis, and so we can take simple averages. The cost of this policy is approximately 1.3 per cent of taxes for 12 years.

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“In 2011-12, 1.3 per cent of Scottish taxes amounted to £750m which provides a rough estimate for the real-terms annual cost of this policy.”

This is split into £550m in additional pension costs and a £200m reduction in tax revenues.

The Scottish Government has pledged to continue paying the basic state pension at the current rate if there is a Yes vote in September’s referendum

Ministers would keep the “triple-lock’’ guarantee to ensure the pension keeps pace with earnings and rising costs, at least for the first term of an independent parliament in Edinburgh, with pensions promised to increase by at least 2.5 per cent a year. An expert commission would be established to consider the appropriate age threshold for pensions – with Ms Sturgeon having already suggested this could see people in Scotland picking up their state pension earlier than those in the rest of the UK.

Spending on the state pension in Scotland in 2011-12 had amounted to £6.3 billion, the report said, almost 10 percent of total public sector expenditure in Scotland.

The experts say the costs of the state pension would be lower in Scotland, due to the country’s lower life expectancy. They add that this could, in theory, be used to reduce contributions or to delay increases in the state retirement age in Scotland.

But the report goes on to warn: “If there are many pensioners and few workers, then such a policy could still be costly to fund.”

Lower taxes - for now

AN INDEPENDENT Scotland could cut taxes below the UK rate because of “different characteristics” between the economies north and south of the Border.

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But the prospect of North Sea oil running out in a few decades and mounting public sector debt could eventually drive taxes up, according to the Institute of Fiscal Studies.

And the recent SNP government white paper on independence contains more “giveaways than takeaways”, the IFS claims in a paper published as part of the NIESR review yesterday.

“Many of the differences between the characteristics of Scotland and the UK suggest that Scotland should have a lower level of overall taxation than is optimal for the UK,” IFS authors Rowena Crawford and Gemma Tatlow state.

But the “long-run fiscal pressures”, such as North Sea oil running out in the latter half of the century, could also “point to a higher level of taxation”.

The Scottish Government has insisted that oil could keep flowing until the near the end of the century, although this is disputed by the Office for Budget Responsibility. Scotland’s energy minister Fergus Ewing suggested last year that if the right policies were pursued, Scotland’s offshore oil industry – which is key to the SNP’s independence plans – would still be productive up to the year 2100.

The IFS says the recent Scottish Government white paper set out a “very laudable set of objectives” for reforms to the tax and benefit system of an independent Scotland, but was “short on detail about how this would be achieved”.

“The specific policies that were proposed contained greater giveaways than they did takeaways,” it added.

A new kind of state

AN INDEPENDENT Scotland would have to “adapt” to find its place on the world stage as a small state.

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And although the recent white paper on independence indicates that the country would be a Nordic-style “social investment” state, it remains unclear which direction Scotland would take.

“Small states may be at a disadvantage in world markets but can also adapt successfully,” say Professor Michael Keating and Malcolm Harvey in a paper for the NIESR review.

“There are different modes of adaptation, notably the market-liberal mode and the social investment state. Either mode is dependent on internal institutions, social relationships and modes of policy-making.

“The Scottish white paper on independence supports the social investment state. Scotland has some, but not all, of the prerequisites for this so that independence would require internal adaptation.”

But even the idea of these small Nordic states has been changing in recent years, it adds.

“These states have a large public sector, with highly developed welfare states and extensive public services,” the paper says.

Tax levels are also high, but corporation taxes are often kept low to attract global firms – in line with Alex Salmond’s plans.

Public services are generally provided on a “universal rather than a selective basis” which also tallies with the Scottish Government’s approach to free education, prescription charges and personal care.

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The same services are provided to everyone, rather than targeting specific groups through means testing.

This, the report says, is to “ensure that the middle classes stay on board and that a strong sense of shared social citizenship is maintained”.

“The social investment model has considerable appeal, offering the prospect both of growth and of social equality, but it does not in itself offer a specific set of policies,” the report concludes.

Demographic changes

SCOTLAND’S ageing population would leave it worse off as an independent country than part of the UK.

But a major demographic headache is looming even under the status quo, according to a report by academics Katerina Lisenkova and Marcel Merette in the NIESR review.

The overall income tax take in the UK after a No vote has to go up by 8.5 per cent by 2060 to meet the ageing effect, the report warns. It adds that the labour/income tax rates have to increase still further in the independence scenario, with an extra 1.4 percentage points at its maximum in 2035.

“Unless the speed of population ageing in Scotland increases rapidly relative to rUK,” it concludes, “demographic change is not a strong argument influencing the choice between the status quo and independence.”


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