Independent money matters
- 3 February 2012
- From the section Scotland
The case for an independent Scotland joining a sterling currency zone has been put forward in three different forums over the past couple of days, with at least four arguments.
One: others do likewise, sharing currencies. Two: the Bank of England would have to treat Westminster and Holyrood as equals. It's a shared institution, and should be answerable to both successor governments.
Three: George Osborne doesn't have to get permission on his Budget from the Bank of England governor, so why would a Scottish Treasury boss? And four: the problems of the eurozone are down to fiscal mismanagement, not to the existence of the currency alliance.
But the pressure over the subject is not relenting, with another heavyweight economic analysis weighing in with a warning that a currency union with the rest of the UK may be "even more restrictive" on taxation and spending than staying with the UK.
More of that later. But to recap, the SNP has kicked Scottish membership of the euro into the long grass. Instead, it would have an independent Scotland stick with use of the pound sterling.
Its assumption is that Whitehall would "bite off our arm" to form a currency alliance. It reckons that denominating Scotland's oil in sterling would save the Rest of the UK (RUK) from having to import the stuff, thus propping up the currency's value.
Ministers are choosing not to talk about the conditions that might be placed on Scotland within such a union - for instance, the constraints not only on monetary policy, interest rates and the supply of money, but also the alliance's constraints on its members' taxation and spending policies - what's known as fiscal policy.
Finance Secretary John Swinney has addressed that issue in his David Hume lecture on Thursday evening. His assertion is that Holyrood has shown fiscal discipline, and it would have to continue to do so if it were independent.
That suggests there would be no constraint on economic policy from Scotland's currency partners that could be any greater than the constraints Scotland would choose for itself.
And yet, in the same lecture, the current position of the Scottish government is set out as being strongly at odds with the UK government on whether to use a spending stimulus to boost growth. That is, Holyrood would like to break from Westminster's constraints, and borrow to spend more.
That brings me back to the latest range of arguments in favour of Scotland being part of the sterling union.
Alex Salmond was answering MSPs' questions on Wednesday, with a new claim that 11 out of 20 richest economies in the OECD are in currency alliances. Switzerland, for instance.
Its alliance is with Liechtenstein. Now, the wealth of the tiny mountain kingdom is perhaps to be envied, but it's not clear that the junior partner in that alliance has much say over the monetary policy set for the Swiss economy. If it does, it's possibly not as an equal.
The US has several countries use its currency, but it's unlikely any of them would think that gives them the right to influence economic decision-making in Washington DC.
Among the 11 nations are several from Europe, where the currency union has well-known stresses. It hasn't meant getting central clearance for national budgets, but the recently-agreed pact is pushing things in that direction.
So the unhappy current experience of that currency union will mean future ones - say, between Scotland and the RUK - is likely to have firm rules that bind partners for the bad times of divergence and fiscal incontinence as well as the good.
The latest academic contributions include Professor John Kay, a former member of Alex Salmond's Council of Economic Advisers, saying an independent Scotland would face such big constraints from currency union with RUK that people would wonder what the point of independence was.
That observation is echoed by Angus Armstrong, director of macroeconomic research at the National Institute of Economic and Social Research in London.
He's written an academic paper that has been welcomed by John Swinney, at least insofar as it says it would be sensible for an independent Scotland to use sterling. That's on the basis of the strong trading links across the border and the strong convergence of the economies. Armstrong says 40% of Scotland's output is sold to the RUK, or, following independence, 60% of all Scotland's exports.
But the economist goes on to argue that Scotland would be left with "little latitude for tax competition". That would include the SNP's case for cutting corporation tax in Scotland, which Prof Kay described last week as "a fantasy".
If you were listening to John Swinney's David Hume lecture, however, you might have noticed that aim sounds less ambitious than in the past. Instead of Ireland's 12.5% tax rate, he's citing research on a 3 percentage point cut from a UK rate soon to fall to 23%, resulting in a relatively modest increase in jobs after 20 years.
The finance secretary's speech talked more about targeted tax cuts, such as one for the computer games industry, with its strong presence in Dundee. And he was making the case for Air Passenger Duty.
Deal or no deal?
Dr Armstrong's report goes on to say an independent Scotland could expect its public debt ratio to rise to between 70% and 80% of gross domestic product, depending how revenues are shared. The new eurozone pact aims to bring such levels down to a maximum 60%.
By contrast, John Swinney's lecture cited figures from before the financial crash, which pushed government debt much higher, with the claim that an independent Scotland's debt would be substantially lower than that of the UK now.
The two analyses part company on their assumptions about doing a currency deal post-independence with the RUK. John Swinney assumes Westminster would want to do one.
Dr Armstrong assumes Scotland would not be in a formal alliance, instead taking its monetary lead from decisions made in London. He says Holyrood would suffer from more budget volatility, due to the oil price. He cites research showing countries without a central bank pay a premium on their interest rates. And there would be a need for Scotland to generate its own contingency reserves.
"An independent Scotland is likely to find the implicit constraints on economic policy, especially fiscal policy, are even more restrictive than the explicit ones it faces as a full part of the UK," writes Dr Armstrong.
That conclusion is unhelpful to the independence cause - to put it gently. So, all the more reason to push for a currency deal with the Treasury and the Bank of England.
The key question is: on what terms and conditions would that deal be struck?