Nicola Sturgeon yesterday defended plans to change SNP policy this week and to make a new Scottish currency its official position – but warned activists seeking a quick-fire approach that they risk undermining the case for independence.
Professor John Kay, a former member of the First Minister’s Council of Economic Advisers, says the viability of the switch is an open question.
And if the new currency struggled to win the confidence of global markets it could see inflation rise and push up the cost of living for ordinary Scots, according to other economic experts.
The SNP leadership is proposing six stringent fiscal tests before introducing a new currency which may delay it by up to a decade after a Yes vote. In the interim Scotland would simply use the UK pound, in same way as Panama uses the US dollar.
But this proposal from Finance Secretary Derek Mackay and deputy leader Keith Brown faces a challenge from activists who are demanding the adoption of a new currency without delay.
Former East Lothian MP George Kerevan is leading the Campaign for an Independent Currency (CIC) which wants to scrap the fiscal tests and adopt a new currency in the first term of the inaugural Parliament after independence. Another amendment also wants the tests scrapped and a new currency adopted quickly.
Professor Kay, who sat on the Council of Economic Advisers under Alex Salmond, says the leadership’s approach is “entirely sensible.”
“You can only have an independent currency if people would want to hold it – and on day one post-independence why would they want to hold it?” he said.
“But you can carry on using sterling unilaterally frankly for as long as you like. That’s a perfectly viable option.
“That doesn’t rule out the option of moving to a separate Scottish currency at some time in the future. But there are two points there. One is that it’s very hard to see large advantages of actually having a distinct currency. And secondly, to have a separate currency you have to persuade people both domestically and internationally that you want to hold it.
“It would be open to question whether you would want to go through the bother of having your own currency.”
A stand-alone currency could give Scotland control over fiscal levers such as interest rates, but using sterling would mean being subject to UK monetary policy without any influence. This has prompted claims Scotland would be little more than a “vassal state”.
But Kay added: “With a small country in a big world, the capacity to make your own choices is very limited. You’re not going to maintain interest rates which are materially different from the UK or, for that matter, European interest rates.” This is because the Scottish and UK economies are so closely linked in areas like trade and investment. “We live in a complicated, interdependent world,” Kay added.
The currency policy was widely seen as the weak point in the case for independence in 2014. The SNP proposed sharing the pound in a formal currency union with the rest of the UK, but this was ruled out by the Tory government and Labour opposition.
The First Minister said yesterday that the approach of UK parties in 2014 had persuaded her that an independent currency was the best approach. But she warned activists seeking to ditch the fiscal tests that such an approach is “not credible.”
“To do so would be tantamount to telling people we will press ahead regardless or our state of preparedness, or the state of the economy, or indeed the interests of the country as a whole,” she said in an article for the National. “That would not be a responsible approach to take and it would undermine rather than enhance the case for a Yes vote.”
Professor David Bell, a former adviser to the Scottish Parliament’s finance committee, said the potential dangers of switching to a stand-alone currency are that people may not use it.
“You can’t force people to use a currency or not use a currency,” said the Stirling University economist who is part of the Centre for Constitutional Change. “There are many countries where the official currency isn’t necessarily the currency that’s in most widespread use.” The public want a currency to have a “store of value” which won’t decline and leave them out of pocket.
“What you really, really wouldn’t want to happen, politically, is that you set up a currency in your newly independent country and nobody uses it,” he said.
Low productivity levels in Scotland could see any currency quickly “lose value”, according to Professor David McCausland, director of the business school at Aberdeen University. Although this would be good news for exporters, goods coming into the country would be more expensive. “This would increase inflation and push up the cost of living for Scottish consumers,” he said.
The credibility of the new currency could be undermined if the country’s £13 billion deficit – about 8 per cent of GDP – is not brought down to closer to 3 per cent in line with international standards. The SNP leadership’s key tests recognise this, as well as the need for adequate reserves to be built up by the fledgling central bank to guard against fluctuations in value.
But McCausland added: “The decline in fiscal revenues over recent years does not paint a rosy fiscal outlook in this respect. A tax bombshell may be the only way to reconcile the need to constrain debt given the SNP’s ambitious spending plans.”
Trading with other nations would also become subject to transaction costs which could be a “significant challenge” for businesses. “In a country that has supported close ties to the EU and its single market ostensibly to minimise impediments to trade, it is ironic that this currency proposal could add further barriers to trade,” McCausland added.
David Gibbons-Wood, a lecturer in economics at Robert Gordon University, said the UK was an “optimum currency” because of the freedom of movement of people, fiscal transfers, capital mobility and business cycles which are in sync.
“Really there’s not much that Scotland can do with the currency, the choices, that can be any better than that.”