Scottish independence: New Scottish currency must be optional after independence, states Sir John Kay

Any introduction of a Scottish currency following independence must not be mandatory for people or businesses to have the best chance of success, a leading economist has said.

Sir John Kay, who sat on the Scottish Government's Council of Economic Advisers under former first minister Alex Salmond prior to the 2014 independence referendum, was speaking on Wednesday evening at the Edinburgh International Book Festival on the topic of a new essay called ‘Scotland’s Money’.

The economist, who refused to be drawn on whether he backs the cause of independence, said it was integral for there to be no sweeping legislation by a future Scottish Government to ensure the use of a new Scottish currency.

He said: "It is essential that any discussion of currency options after independence make clear that a future Scottish Government would have no intention of changing the terms of its own existing contracts or of legislating to change the terms of private contracts.

"This assurance should particularly include, but should not be confined to, agreements governing savings and loans, and employment.”

The pamphlet adds in a frequently asked questions section on what would happen to private pensions, bank accounts and mortgages with a new currency, that “nothing” would happen.

“Unless the Scottish Government passed legislation to alter their denomination or value,” Sir John continues.

"It is very important that the pro-independence parties make clear that they would not propose to do this.

Nicola Sturgeon is yet to outline an updated version of the Scottish Government's position on currency following independence.

"Any threat that a Scottish Government might introduce such legislation would lead to people immediately taking action in anticipation, with many adverse consequences.”

The question of what currency an independent Scotland would use following a Yes vote dogged the pro-independence side during the 2014 referendum, with many claiming the issue was a central reason for the No camp’s eventual victory.

A report by Nicola Sturgeon’s own Sustainable Growth Commission in 2018 updated the SNP’s position, recommending the continued use of Sterling following independence, something Sir John said was both “prudent and feasible”.

However, last year, the First Minister admitted the model was “completely out of date”.

An updated currency policy for an independent Scotland is yet to be outlined by the Government.

Sir John’s essay also states a newly independent country would be saddled by a deficit from day one of independence, which would be financed by borrowing, and reduced either by austerity or the development of the Scottish economy.

He also said Scotland would not need to be economically large enough to rescue so-called ‘too big to fail banks’, stating this was not a good argument against separatism.

The economist warned, however, “there are no relevant precedents” for Scotland becoming independent.

"A lesson from other experiences is that abrupt and botched transitions can cause considerable economic damage and personal distress,” he said.

“Eventually governments and the private sector together evolve some functioning system of money and credit, but the recovery can be protracted and costly.

"There is a real possibility that a premature and ill-planned introduction of a Scottish currency would be an embarrassing fiasco, ignored by most of the world and unappreciated by Scottish residents.

"If independence were to happen, the economic consequences would depend on many aspects of policy and behaviour, of which currency is one of the least important.”

The fourth episode of the brand new limited series podcast, How to be an independent country: Scotland’s Choices, is out now.

It is available wherever you get your podcasts, including Apple Podcasts and Spotify.