Keeping sterling 'has its problems'

Feb 3 2012

An independent Scotland is likely to be more constrained on economic policy than as part of the UK, according to a research paper.

The National Institute of Economic and Social Research, based in London, examined monetary and fiscal policy choices facing Scotland if it leaves the union.

The report, by Dr Angus Armstrong, found it would be "sensible" to retain sterling, as proposed by Finance Secretary John Swinney, but said that course of action would have its own problems.

Mr Swinney has said he cannot envisage the economic conditions being correct for the euro "for some considerable time".

However, the report argues it is "doubtful" if the Bank of England would extend lender-of-last-resort facilities to Scottish institutions. Dr Armstrong said fiscal balances will be volatile because of heavy reliance on oil, and that Scotland would be open to the threat of default.

The report adds: "With a pro rata transfer of existing UK public debt, Scotland would enter independence heavily indebted with no insurance from fiscal risk sharing or fiscal transfer mechanism with the rest of the UK.

"Even with a favourable settlement on future oil revenues, its fiscal balances are likely to be volatile with large deficits in some years as a result of its dependence on oil revenues."

The report continues: "An independent Scotland is therefore likely to find the implicit constraints on economic policy, especially fiscal policy, are even more restrictive than the explicit ones it faces as part of the UK."

Mr Swinney said the report "validates" the policy to retain sterling after independence. He said Scotland would be in a "healthier" position than the UK as a whole, with public sector debt currently lower than the EU and G7 average.

Mr Swinney added: "By keeping sterling after independence, we will have exactly the same relationship with the central bank as does the Westminster Chancellor, who has not set interest rates since 1997."