Will Scotland keep fighting?
By Barnaby Wallis
“Independence is about equipping ourselves to navigate the future, guided by our own values, aspirations and interests…and that takes more than a changing of the guard at Westminster”
-Nicola Sturgeon
Scottish Independence - feasible or farcical?
Last October, Nicola Sturgeon laid out her latest plan for an independent Scotland. The first minister vowed to re-join the EU, transition towards a Scottish Pound and take back control of its oil reserves, creating a “more prosperous and fairer future” for Scotland. However, some girthy problems lay ahead, namely in currency, how to leave and debt.
The first issue facing Scottish independence is about currency, where Scotland has three ways to go. One, to keep using the Sterling; this is seen as unfavourable because it would mean that Scotland’s central bank would have no control over monetary policy and its requirements would not be considered by the Bank of England without a formal agreement. Two, a new Scottish currency that is temporarily pegged to the Sterling foreign exchange rate. This is known as “Sterlingisation” and would remain in place until Scotland was able to transition to their own Scottish Pound; it shares the same issues as staying with Sterling regarding monetary policy but also around maintaining the value of the Scottish currency. Third, Holyrood could create a freely tradeable, floating currency. This would allow Scotland’s Central Bank to set its own targets for monetary policy, but would leave many issues in the air, such as trading, conversion issues and debt. With the UK’s debt now above 100% of GDP, two big problems are how to divide this debt and how to transfer the debt.
One thing that’s for sure is that it will be closely negotiated if Scotland does achieve independence. The main option is to follow the “Velvet divorce” precedent set by the splitting of Czechoslovakia, where, in general, debt is divided proportionately by population size (and physical assets belonging to the country they were in - Scottish North Sea oil...). This would leave Scotland with 8.4% of outstanding debt.
One solution to transferring the debt is the “IOU”: The UK government remains liable for all outstanding debt, but Scotland commits to paying its fair share of interest payments. In this situation, the UK bears the risk that Scotland defers or even ditches the commitment! Alternatively, Scotland pays all the money it owes in a “clean break” on independence, which the UK would prefer as it relieves the taxpayer of any liabilities for Scottish debts immediately. Thirdly, Scotland may have big issues with its fiscal policies (those concerning tax and government spending). Scotland’s fiscal deficit as a percentage of GDP in 2021 was 12.3%, over double that of the UK. Public spending per head in Scotland is 30% higher than in England. This means that if Scotland were to leave and become entirely responsible for its own fiscal policy, tax would need to rise sharply, or spending would need to be cut by £1765 per head, to achieve neutral fiscal status. That’s equivalent to 2715 pints of semi-skimmed Tesco’s milk. Although England also operates a fiscal deficit, the bigger the deficit, the more the national debt would increase and therefore the more debt repayments would increase. There is a large opportunity cost of such payments because the money could be used elsewhere to improve public services.
Who needs who the most, England or Scotland?
