ECONOMY

No single best choice for currency in independent Scotland, think tank says


T

he Government in an independent Scotland could have to consider either tax rises or spending cuts “before too long” no matter which currency option was adopted after the leaving the UK, a think tank has warned.

The Institute for Government published new reports looking at the currency and borrowing options that could be available, should Scotland become independent.

But the paper on currency stated: “Whichever currency option an independent Scotland adopted, before too long it would probably have to run tighter fiscal policy than the position that Scotland would be likely to inherit on day one.”

This “tighter fiscal policy” could potentially mean spending cuts, tax rises, or both.

First Minister Nicola Sturgeon wants Scots to have another independence referendum before the end of 2023. (Andy Buchanan/PA)

While the think-tank identified several potential options for currency in an independent Scotland, it ruled out a formal currency union with the UK – which the SNP had proposed in advance of the 2014 referendum – on the basis that the UK Government would not agree to it.

It also ruled out immediately joining the euro, adding that this would “only be possible only in the medium term – once Scotland had jumped through the necessary hoops” of re-entering the European Union and then meeting the necessary conditions for membership of the eurozone.

The think-tank concluded that “using sterling informally maybe the most attractive option at the very start”.

This fits with current SNP policy, which is that Scotland would retain the pound after independence, before seeking to establish its own currency.

The report added: “Once an independent Scotland had established its reputation for prudent fiscal policy and a commitment to low and stable inflation – and had time to build foreign exchange reserves – the attractions of issuing a new currency would probably increase.”

It went on to say that under such conditions a new currency “would be likely to be less volatile”.

There is no single best choice, all options would come with trade-offs

The Institute for Government also claimed leaving the UK could “constrain Scotland’s fiscal policy because there would be limits on how much it could borrow year after year”.

And it warned that “Scottish debt interest costs would probably exceed rates that the UK could borrow at if Scotland remained in the union”.

Even in the the current low interest rate environment, the think tank estimated that “Scotland’s borrowing costs would be 0.4–0.9 percentage points higher than UK rates”.

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