CURRENCY IN AN INDEPENDENT SCOTLAND

by Chairman of Fiscal Commission Working Group, Crawford Beveridge taken from the Scottish Government site.

Earlier this year the Fiscal Commission working group, which I chair, set out its thoughts on independence for Scotland, making recommendations on the currency that Scotland should use on independence and the way in which an independent Scotland could run its financial affairs.

The members of the group have made clear that they will remain impartial in the debate on Scotland’s future. However, in preparing the report there was no doubt in the minds of the four world leading economists – including two nobel prize winners – who make up the Commission working group that Scotland is a wealthy and productive country that has “the potential to be a successful independent nation.”

The working group’s report was clear that the best currency option for Scotland – and the UK – would be to retain Sterling and continue with the Bank of England operating across a Sterling Zone as part of a formal monetary union.

Some commentators, such as the House of Lords report last week, have suggested that a currency union may be too complicated whilst it is widely reported that the UK Government will talk down the prospects of a currency union or suggest the constraints on Scotland would be too restrictive.  As someone who has looked at this closely, debated the question with the Commission members and thought carefully about what this means for business, I cannot see how these claims hold particularly in the context of the proposition put forward by the Fiscal Commission.

A currency union is to me, the most sensible option, the simplest option and is clearly best for Scotland’s businesses and households. It could work seamlessly from day 1, would provide a continuing platform for trade and would help the division of assets and liabilities which are denominated in Sterling. With monetary policy determined at the Sterling Zone level, key opportunities for growth and tackling inequalities would flow from greater access to the key economic levers that would flow from such an arrangement. As the recent financial crisis has highlighted, risks also have to be managed – as they do under any macroeconomic framework including remaining in the Union – and in my view, the balance of opportunity and risk is enhanced, not inhibited, by a currency union.

At the most basic level, as the fiscal commission proposition sets out, a vote for independence would see key economic levers transfer to the Scottish Parliament and it would be for people in Scotland to decide how to use them to grow and rebalance the economy , to counter the geographic pull exerted on finance and jobs by London and the South East,to deliver the infrastructure and services reflecting the
choices of the people in Scotland and to provide greater opportunities for all.

With independence all revenues raised would be retained by Scotland for Scotland. At present only 7% is raised and retained locally and whilst this will increase to 15 per cent with further devolution this still reflects a constrained and centralised system.

Alongside this welfare and employment policies would also be the responsibility of the Scottish Parliament under independence with the opportunity to establish a system that reflected the values of the people in Scotland – rewarded work while properly protecting the most vulnerable in Scottish society. There would also be far greater scope to integrate such new responsibilities with our existing powers in skills and education.

At the same time, the Scottish Parliament currently has no influence over the wider economic levers of regulation and competition policy, over markets that affect key areas of every-day life such as the energy market or in determining issues like employment rights or the use of intellectual property and patents to support growth and jobs.  These powers and responsibilities would come to Scotland with independence.

As the Fiscal Commission Working group said in their report, political considerations may cloud pre-referendum comments and policy statements, but these will differ significantly from the actual decisions taken post referendum when it will be clear to the UK, as well as to the Scottish Government, that an agreement would be in their common interests.

A mutual agreement on borrowing and debt levels, something which would underpin a currency union would be good for both economies.  Imagine if we had such effective controls prior to the crisis to stop the build-up of the massive public sector debts we are currently paying for?

Any economist or Chancellor knows that every economy is subject to constraints, either by a formal arrangement such as a Sustainability Agreement or by the power of the markets.  As the Balance Sheet recently published by the Scottish Government sets out, Scotland is in a relatively stronger fiscal position than the rest of the UK and meeting any such realistic targets would currently be easier for Scotland. Ensuring that this remained the case should help focus the minds of policymakers in London and Edinburgh on the importance of growth and ensuring everyone has an opportunity to succeed.

The four economists on the fiscal commission who have designed the currency union have nothing to gain from the decision the people of Scotland take.  In contrast, I fully accept that the UK Government and bodies like the House of Lords have a  very active stake in the debate and are clearly opposed to Scotland becoming independent.

However, I firmly believe that if there is a vote for independence, our proposal for a currency union will be in the best interests of the rest of the UK. This is what particularly disappointed me about the House of Lords report – it lacked objective scrutiny and it’s arguments were not supported by its own data.

As we recommended in our report, the right response to our proposals is for both the Scottish and UK Government’s to engage in technical discussions on the proposals the Commission has made and look at how they would go about delivering them..

My personal support for independence is well recorded.  My experience with the fiscal commission, has made clear to me that independence, alongside a currency union,  will give Scotland the means to strengthen its own economy whilst continuing a cross border market for  both countries and for the people and businesses within them.

(The illustrations are mine)