The 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.
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”.
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”.
Gemma Tetlow, chief economist at the Institute for Government and author of the report on Scotland’s currency options, said: “Scotland’s currency choice would have far wider implications than just the cash people use in their day-to-day lives – including implications for financial stability, what freedom the Government has to use monetary and fiscal policy, how easily businesses can trade with other countries, and the attractiveness of Scotland to foreign investors.
“There is no single best choice, all options would come with trade-offs.”
The papers have been published following confirmation from Nicola Sturgeon, the Scottish First Minister and SNP leader, that the Scottish Government is restarting work on a “detailed prospectus” for independence.
Sturgeon has already said she wants to hold another vote on the future of the UK by the end of 2023, assuming it is safe to do so amidst the ongoing coronavirus pandemic.
Pamela Nash, chief executive of the pro-UK campaign group, Scotland in Union, said the reports showed the “astonishing risk and recklessness of the SNP’s plan to scrap the pound”.
She stated: “Introducing a new Scottish currency would have devastating consequences for our economy, with a knock-on impact on how much we can spend on hospitals, schools and social care services.
“When our NHS is in crisis and people are waiting hours for ambulances, and we have years of recovery ahead of us following Covid, this proves just how irresponsible the SNP’s separation blueprint really is.”
A Scottish Government spokesman said: “As the First Minister set out last week, work on a detailed prospectus is now being taken forward in line with the democratic mandate which has been secured for a referendum.
“The evidence shows that many independent countries of Scotland’s size have higher national incomes per head than the UK.
“Given Scotland’s resources and advantages, there is no reason an independent Scotland would not also be a successful economy – free of the damage of Brexit.”