An independent Scotland must act quickly to rollout its own currency

INVITED to Christmas parties, economists reach for their black hats with “humbug” printed on the white trim. Thinking about what the recent negotiations on the new fiscal framework might mean for Scotland, expect all the peace and joy which comes with a visit from the Ghost of Christmas yet to come.

When teams from the Scottish Government and the Treasury sat down earlier this year to negotiate the structure of the framework until 2029, the Scottish Government almost certainly sought to obtain more borrowing powers. Kate Forbes has confirmed that was her intention before she went on maternity leave.

By the time the negotiations concluded, she had left the government. Reflecting ruefully on the outcome, she believes the failure of the negotiations to secure the sort of borrowing powers for which she had intended to argue simply reflected the imbalance in power between the parties. On this point, she has reached a very different conclusion from Jim Cuthbert, an excellent statistician, who has become one of the Scottish Government’s most trenchant critics in his retirement.

He sees the recent agreement as just the latest in a long line of policy failures, describing the Scottish Government as “The Turkey that voted for Christmas (twice)”. Both when the fiscal framework was developed, and in the recent negotiations, it failed to achieve adequate borrowing powers.

Scotland can't put its trust in the UK Treasury when it comes to a post-independence currency

Jim Cuthbert is quite right to suggest that, without borrowing powers, it may be impossible for the Scottish Government to manage the economy effectively. Scotland could become the most highly taxed part of the UK, and its government would still struggle to finance its planned expenditure.

Were it to raise tax rates in Scotland when the economy was relatively weak, a complex set of adjustments in the UK’s block grant to Holyrood would kick in. Especially if there was active tax avoidance among higher-rate taxpayers, those effects could easily combine so that raising taxes would result in reduced revenues.

The trigger for this to happen might be a small change in the structure of the UK economy which would be felt strongly in Scotland. The continued concentration of investment management in London, or a sudden running-down of the oil and gas sector, would both be enough.

Strictly, such circumstances – recession in Scotland as opposed to general stagnation across the UK – would merit provident spending by government to rebalance the economy. And without borrowing powers, that would be almost impossible.

AND, as Jim Cuthbert has pointed out, there could be serious implications for economic prospects in the long run. Trying to rebalance the economy, the government would have to reduce its prudential spending, which is intended to support economic and social development.

READ MORE: The bank of the Faroe Islands can help guide Scotland

Relative to the UK, Scotland would become progressively poorer, reversing changes which took place in the first 25 years of devolution.

The Scottish Currency Group believes that, to secure Scotland’s prosperity, it will be essential to establish a separate currency immediately or very soon after independence. The latest fiscal framework agreement demonstrates how little we can trust the UK Government as a partner for prosperity.

As we explained just over two weeks ago, the Faroes have flourished as an autonomous territory while remaining part of Denmark because it is widely accepted that its government can act almost as if the islands were (already) an independent state. The UK Government does not extend that sort of liberty to any of the national governments in these islands.

Yet we are asked by the present Scottish Government to believe that, in choosing independence, the best currency policy will be to put our trust in the UK Treasury as a dependable partner, and not to start the process of setting up an independent currency too early – because the Scottish Government, which has no track record of managing borrowing, would be insufficiently trusted in financial markets.

This is perverse.

Substantial borrowing powers are not some nice optional feature for a Scottish Government which wishes to achieve the country’s independence. They are essential. Repeatedly failing to acquire them suggests a continued lack of understanding of their strategic importance.