Independent Scotland needs own currency to challenge UK orthodoxy

THE independence movement is in danger of missing a golden opportunity by not challenging head-on today’s prevailing economic orthodoxy which, judging by recent policy statements by Rishi Sunak and Keir Starmer, has captured the political leadership of both main UK parties, their advisers, the media, and most of the general public.

Examples of this orthodoxy are statements such as “there is no money left”, “our credit card is maxed out”, and “we must reduce the national debt so that our descendants are not burdened”. The false underlying assumption is that governments are like private households where income and expenditure must be balanced and borrowing could quickly become unsustainable.

READ MORE: The most bizarre myth about Scotland's currency after independence

Governments which have their own central bank and issue their own currencies (such as the UK Government and that of a future independent Scotland) are not constrained in the same way as households or institutions (such as local authorities or the present devolved Scottish Government) which merely use currency.

An independent Scotland with its own currency would have much greater freedom to increase public expenditure to tackle issues such as those mentioned below and which will be explored in more depth in future articles. This could include government borrowing from its own central bank and innovative policies such as quantitative easing if designed and implemented responsibly as part of an integrated strategy for sustainable economic development.

The major UK parties exaggerate the importance of the so-called national debt. This represents the savings which individuals and institutions have decided to place with the government. The present level of UK national debt in relation to GDP is lower than that of several other European countries. It is also less than half of what it was shortly after the Second World War (the years in which the NHS was established).

Much of the recent increase in government borrowing in response to the Covid crisis is held in the form of Treasury bonds by the Bank of England (above) and does not need to be repaid.

Part of the post-WW2 national debt consisted of War Bonds issued during the war, based on proposals by Keynes. These did not finance the war – they were designed to encourage saving by the British public at a time when there was a shortage of consumer goods for folk to spend their money on.

They were designed to control inflation and constituted future claims on the post-war economy. War Bonds are a classic example of how much of the “national debt” is owed primarily to the British public either as individuals or through savings institutions and is not debt in the sense that people usually think about it.

The present Scottish Government, which rightly supports a separate Scottish currency “as soon as practicable” after independence, should in our view make it clear it will be for the post-independence government to decide precisely when the new currency should be introduced.

There is no need to set out its views on what criteria should apply in advance – the post-independence government will be best placed to take such decisions. The present government should concentrate on ensuring that all options are available to the post-independence government.

That means making all necessary preparations, including the establishment of a central bank and associated payment systems, in advance of independence.

Examples of how the full powers of independence could be used to transform Scotland include:

• -Properly resourcing the Scottish NHS, social care, and other public services, to European levels;
• -Investing in renewable energy for a just transition from fossil fuels, ensuring maximise benefits for the Scottish economy;
• -Increasing pensions and other social benefits for low income households;
• -Tackling climate change, reducing fuel poverty, and addressing the cost of living crisis.

None of this means there would be no constraints on an independent government. Responsible fiscal and monetary policy would be essential. There would, of course, be the risk of inflation if excessive demand resulted in the real resources of the economy becoming stretched.

But having our own currency would transform the social and economic opportunities available to Scotland and enable leaders of the independence movement to set out an inspiring and persuasive vision for the future – in stark contrast to the dismal prospect of years of austerity which face the UK under both Conservative and Labour parties. Far from being a distraction, independence is the key to achieving a better Scotland.