The National:

IN a report issued last week the London based Institute for Government offered its opinion on currency and borrowing options for an independent Scotland.

The Institute correctly noted that an independent Scotland could not use the pound or euro and probably could not afford to peg its currency against either, ruling out the SNP leadership’s preferred option of ‘sterlingisation’ in the process.

Although there are reasons to think its technical reasoning on this last issue was wrong the conclusion is correct: Scotland should undoubtedly let its currency float when it becomes independent. That simply means it will have the type of variable exchange rate that everyone in the UK has got used to over the last 40 years, so there is nothing very surprising about that suggestion. It is, however, welcome to hear it said and I rather hope that this might close down debate on this distraction in the independence debate.

Where the Institute for Government got things wrong was with regard to the deficit Scotland might have, and in how it might be funded. They suggested that the deficit might be 8%, and that is a GERS based estimate. As anyone who has read GERS knows, it is quite emphatic that it provides no indication of what might happen in an independent Scotland and so the Institute for Government should really not have used that figure.

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Nor should they have moved on from that error to then say that a deficit of this scale would not be supported by the international money markets. Implicit in that comment were several rather basic errors. The first such error was to suggest that a government with its own central bank and currency is funded by either tax or borrowing, when that is not true. It is instead always funded by central bank money creation. That money creation can be cancelled by either taxation, borrowing or quantitative easing, or simply be left on a central bank overdraft that any government can run. The point is an important one. It makes clear that the Scottish government after independence will not be dependent on financial markets.

Second, the Institute for Government showed that it does not understand the role that financial markets now play. They do not, as it suggested, provide funding for government. They are instead the place where those who want to save with a government place their funds. The so-called national debt is simply made up of these savings account. If you are in doubt remember that both Premium Bonds and National Savings and Investments accounts are part of the so-called national debt and they are very definitely savings accounts. The so-called called government gilts (or bonds) that are owned by the wealthy, pension funds, banks and life assurance companies as well as some foreign investors all perform exactly the same function, just on a bigger scale. They too are just savings placed on deposit with the government. But in that case, the Scottish government will not be dependent upon foreign savers, but will instead be doing foreign savers the favour of being able to place money on deposits in Scottish government-guaranteed Scottish pound savings accounts that are always guaranteed to repay in an otherwise uncertain world.

Third, foreign savers are not, in any case, the majority of those saving in the UK at present. Only around 28% of what the Westminster government chooses to call national debt is actually foreign-owned, and much of that represents the sterling deposits of foreign governments. The same governments might well want to hold despots in Scotland when it is independent.

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But if they don’t the right response is not to panic, as it seems the Institute for Government has, to instead say, "so what?" That is because if it turns out that If after independence it turns out that international investors did not want to deposit funds with the Scottish Government all that government would have to do is persuade more Scots to do so.

My research has shown how easy this might be. There is likely to be well over £1 trillion of wealth in Scotland right now, admittedly much of it in houses, but of the rest most is in either ISA accounts or pensions, which are tax subsidised. Suppose that the Scottish government changed ISA rules so that the tax-free savings they provide were only available if the money was despised with a Scottish National Savings Bank.

Suppose it offered a 1% interest rate - which is way more than most people can get right now. If it did just that money would put into these accounts. There would literally be no need to rely on international bond markets at all in that case. The people of Scotland could provide all the money needed instead. Tweak the rules regarding pensions and even more could be found.

The point is a simple one. It is that Scotland can fund itself after independence if only it understands how financial markets really function, and with the simplest of policy changes could have all the money it needs to make independence a success, without international money markets posing any threat to it all.

The Institute for Government report can be found here: https://www.instituteforgovernment.org.uk/publications/scotland-borrowing Let’s give credit where it is due.