Opponents of Scottish independence often make their arguments based on what they claim to be objective economic models; “facts and figures”, which “prove” that Scotland cannot possibly function as a viable economy without remaining part of a bigger United Kingdom. It’s a project of fear.
They argue that to be independent Scotland must have its own currency but go on to predict that such a currency would rapidly devalue against the Great British Pound (GBP) and other currencies. It has been argued that a Scottish currency would devalue by 30% because Scotland has a large trade deficit.
It is also argued that Scotland will inherit large and unsustainable fiscal deficits and a growing “national debt” because the “tax base” is too small to support government spending.
What is needed is a pragmatic political approach which is creative and agile when addressing the economic questions, a resource rich country such as Scotland will face. What is not needed is a blatant acceptance of the orthodox neoliberal economic paradigm. To ensure a successful Scottish future a new dynamic approach is necessary; this would involve independent institutions and an independent currency.
Fighting a “data war” is counterproductive
It is tempting to counter these “facts and figures” with reference to other statistical information and/or interpretations of the data. What then follows is a “data war” based on quantitative analysis of the economy, using a variety of competing theoretical models. In the process we are unable to see the wood for the trees and ordinary folk become confused and switch off.
One of the problems with economic statistics is that they are backward looking and are not a guide to what might happen in the future. The future is uncertain and what happens very much depends on how governments and societies respond and the decisions they make. We do make our own history but not in circumstances of our choosing. We can choose to do things differently. The success of Scottish independence will be determined by the choices we make, the mistakes we make and the speed with which we correct those mistakes. None of this is predictable in advance.
Yes, we do need our own currency
As opponents of independence argue, introducing a Scottish currency is a necessary condition for independence. They know that using another currency, such as the GBP or the Euro, means that Scotland cannot control its own monetary policy. It also means that we cannot control our fiscal policy either. Without our own currency the Scottish Government would need to raise enough tax to pay for public spending and to fund any deficit by borrowing in another currency. The Bank of England and the bond markets would determine the interest rate applied to this borrowing.
Without our own currency, Scotland will be swapping dependence on the Barnett Formula for dependence on the bond markets.
The Scottish Government would be a “price taker” because it would need to sell all its bonds. A failure to sell them all would force a reduction in public spending and/or tax increases. This would be a reversion to the economics of austerity.
Introducing our own currency would allow Scotland to avoid this scenario. Establishing a Scottish Central Bank will enable the government to spend what is necessary to achieve its social and economic objectives, employing the resources available to it – labour, skills, technologies, land and other natural resources. It can do this without reliance on borrowing money on the bond markets as it can run an overdraught at the Scottish Central Bank instead. This is how the UK monetary system actually works.
Our own currency means taxes no longer fund public spending
With the greater policy space that having our own currency and central bank would provide, the size of the “tax base” is no longer a barrier to government spending. Taxes would no longer be the source of money for public spending. The tax system can then be designed to help shape the allocation of the resources available in the economy, so that they are used to produce what people need to live happy and healthy lives.
We can expect Scotland to run large fiscal deficits, especially during the early years after independence, and will develop a large national debt. Fiscal deficits are not inevitably a problem to worry about. They represent only one half of the national balance sheet. What matters is what the spending that created the deficit has been used for. If it has created productive assets which deliver goods and services people need, then the deficit is not a problem. If it has promoted full employment the tax base will grow too, maintaining a limiting factor in the size of the deficit. Increasing a deficit by cutting taxes to benefit the wealthy does not produce useful, productive assets and undermines the long-term productive capacity of the economy.
The national debt is not a debt at all – it is the money which circulates in the economy. Government spending is the private sector’s income and savings.
What is traded and how it is important
Scotland will inherit and continue with running a trade deficit; most small countries do. However, what is of greater importance is the detail of what is imported and exported, and the nature of the relationship with trading partners. Heavy reliance on food imports would be an issue because it implies a low level of food security and vulnerability to supply shocks. If the currency does devalue, imported food prices would rise. Issuing our own currency opens up a bigger space of policy options to address such structural problems in the economy; for example by government financial support to the domestic food sector. A deficit attributable to spending on increasing food production would be productive use of our own currency.
Independence would provide Scotland with capacity to develop industrial sectors able to export high value products. Basing our exports on low value primary products, like agricultural products or unprocessed goods, instead of allocating resources to high value production will lead to trade dependency and exacerbate any pressure on the exchange rate of the Scottish currency.
The nature of our relationship to trading partners is also important. If trade is based on mutual benefit rather than a zero-sum game in which one party seeks to exploit advantages, then trade deficits are not a critical issue.
Future exchange rate of a Scottish currency is impossible to predict
It is impossible to predict the future exchange rate of a Scottish currency. It is highly likely that a Scottish exit from the UK will lead to a substantial devaluation of the GBP. An initial peg of the Scottish currency to the GBP would result in a devaluation against other currencies. But once the peg is released and the Scottish currency transitions towards being a fully floating currency it is impossible to predict what would happen.
A ‘strong’ Scottish currency would slow down Scottish exports as it would increase their price in other markets, but it would make imports cheaper. A ‘weak’ Scottish currency would help boost exports whilst making imports more expensive. Having our own currency would open up greater policy space to address either of these possible scenarios.
The future depends on the choices we make
The fact is, there are no fixed answers to evolving social and economic circumstances. Only dogmatists believe in off-the-shelf solutions. Successful economic management demands pragmatism and a willingness to use a variety of policy tools. Regardless of the many challenges we will experience in a changing world – where we all face the existential crisis of climate change and bio-diversity loss – economic pragmatism, flexibility and an expert economic understanding amongst Scottish politicians that an independent currency can secure a successful Scottish independence.
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