A report commissioned by Options for Scotland and the Reid Foundation has come to the conclusion that having its own currency should be the ‘default option’ of an independent Scotland.
The conclusion is premised on the degree of actual independence an independent Scotland would have under the various currency options it might explore.
The report, with good reason, discards the options of joining the eurozone or of using the pound as a standalone state, without the backing of the UK Government. It says these possibilities are ‘not credible’.
Nor are they.
The eurozone crisis has a way to run and what will emerge at the end of it remains unknowable. It is also inconceivable that any country will now be allowed to join the eurozone without ceding control of monetary policy to the European Central Bank.
Using the pound in an ‘unlicensed’ arrangement might enable a sort of common currency zone in the UK, with all of the practical and commercial advantages that carries – but it would see Scotland with no lender of last resort, a very real security against bad times.
The issue essentially centres on what we mean and what we hope for in ‘independence’.
The ‘independence’ on offer for September next year is a long way from what many imagined – and still hope – the reality to be.
It is different from the devolved situation we already enjoy in little other than branding and devolved fiscal authority will be substantially enhanced by the borrowing and additional tax raising powers to come from 2016 with the Scotland Act.
The argument for a Scottish currency arises from the certainty that negotiating to use the pound with the agreement of the Bank of England, with the Bank acting as lender of last resort, would mean ceding control of monetary policy to that Bank.
First Minister, Alex Salmond has nonchalantly claimed that using the pound without ceding monetary policy control will be possible – because a common currency zone is in the interests of all parts of the current UK.
And it is.
However, it is not in the interests of the UK at any price.
It would be up to an independent Scotland to look after its own interests without any demeaning request for a bit of a hand to get started.
It would be up to the continuing UK to put its own interests first – and while a common currrency zone has a real value for both current UK partners, the continuing UK could not contemplate the risk of having to save its own currency by bankrolling an independent Scotland whose finances had gone off the rails.
On this matter, borrowing and the cost of borrowing is a serious issue – and one on which the possibility of adopting our own currency impacts.
Until a new currency demonstrated its stability – and there would be no lender of last resort – the interest rates we would be charged on our government bonds would be very high because the risk would be greater than with an established currency.
We would also start with a debt burden – our negotiated share of the National Debt and the set-up costs of an independent Scotland ready for independence day in May 2016. These set-up costs would be substantial and would have to be paid for by borrowing, literally on our own account.
Our current obligations under the various loan schemes on infrastructural projects – PFIs, PPPs, NPDs etc – see our repayments already not far short of the 5%-of-budget cap the Scottish Government has pledged to adopt under the new powers to come from the Scotland Act.
An independent Scotland might, of course, simply abandon such notional controls, dispense with the theory behind them and borrow away as it could – but that would be a one-way ticket to trouble.
The Scottish Government’s commitment to benefits and pensions in an independent Scotland are such that it will take the average annual tax revenues from the oil industry to pay for them, as we have previously shown.
Since then, the First Minister has had to pledge to the oil industry that an independent Scotland would match the tax concessions already agreed with the UK government. These are designed to support the industry to reinvest to replace the already over-aged North Sea infrastructure.
The First Minister had no choice but to make this offer – but the cost of it will be very small revenues from corporation tax from the oil and gas industries for some time.
The crux of this is how do we then pay for our borrowing and our benefits?
And this leaves aside the question of how we pay for our crucial infrastructural development?
That, almost alone, is the agent of the growth we must ensure if we are to be sustainably independent – and if we fail, we’re on our own.
A young country with a substantial percentage of its population young and able to work would have the capacity to see itself through hard times. Scotland, with an increasingly ageing population, a pronounced benefits culture and a series of universal benefits commitments, will have a great deal on its back and possibly not the legs to carry that burden.
This is why we have said that an independent Scotland must commit to prioritising its benefits to marry with what it can realistically afford – without including one penny of the unpredictable oil revenues. It must then spend every penny of those revenues on infrastructural development.
We hold to that view but we see no evidence of the political courage to adopt it.
The real risk to an independent Scotland would be the strong likelihood that oil revenues, as and when they came in, would be squandered on fripperies and give-aways that would create a ‘feel good bubble’ following independence.
And that would be the quickest way to national insolvency with no means of recovery.