THE SHAKY ECONOMICS OF SCEXIT

The SNP are to publish a new paper on the economics of scexit. If it is to be taken remotely seriously it will need to address key questions on currency, monetary policy, Sterlingisation and pensions

First Minister Nicola Sturgeon has informed BBC Radio Scotland of plans to publish a new paper on the economics of scexit some time after the party conference. But judging by previous statements on the record, the paper will need to do heavy lifting. The fact is, the SNP have long left unaddressed a number of questions concerning their more preposterous economic plans for independence.

Currency questions

Listening Ms Sturgeon’s interviews with channel 4, BBC and ITV News, it’s hard to escape the conclusion that precious little progress has been made by nationalists in regards to fundamental currency questions.

Channel 4 news correspondent Ciaran Jenkins pressed the First Minister in an interview about the SNP's plans to use the pound as an interim currency after independence.

This is the plan where we would informally continue to use the pound after independence - for an indeterminate amount of time. Known as ‘Sterlingisation’ (currency substitution), it means an independent Scotland using another currency without any official backing and without a Central Bank – instead of using its own currency.

Part of the many implications of this would mean surrendering any influence or control over our own monetary policy, which is an interesting proposal at a time of high inflation. But it also involves a newly independent Scotland having no lender of last resort - i.e. no central bank providing backup. So should things go wrong, no lender of last resort to step in to protect pensions (as the Bank of England recently did to protect pension funds following the disastrous mini-budget).

Ciaran Jenkins asked the First Minister if she could name any other country except Panama and Montenegro which does anything like this. The line of questioning exposed a core truth: there is not a single advanced economy on earth which has either attempted, or plans to, do what the SNP are proposing.

Notice in the First Minister’s exchange she completely failed to address the core question arising from her proposal in regards to currency:

Precisely how long would an independent Scotland be surrendering the security of controlling our own monetary policy?

If we listen to her previous comments about this subject, the answer could well be indefinitely. Back in 2018 the SNP-backed Sustainable Growth Commission said the country should “put in place arrangements” to establish its own currency eventually and only after six strict tests are met.

So realistically the incumbent government in Edinburgh is advocating we undertake a currency policy which has never been done before anywhere else in the advanced world. And we should do it for goodness only knows how long.

The Growth Commission from 2018 wrote that

“Scotland should continue to use the pound sterling following independence without seeking a formal currency union.”¹

How long do we endure “Sterlingisation”?

The questions of long an independent Scotland would endure the SNP’s currency substitution policy really matters. After all, the downsides to currency substation are considerable.

For one thing, it means we would have no ability to print money. So in the event of a crisis, iScotland would have no ability to print money, which could lead to higher bond yields and pressure to pursue austerity.

And that is not some academic hypothetical, it is a very real risk. As recently as 2010 countries like Italy, Portugal and Spain had relatively low levels of government borrowing (compared to UK) but when markets grew concerned at the absence of a Central Bank to secure liquidity – these countries saw rising bond yields and a pressure to cut government spending.

Furthermore, Sterlingisation would mean no ability to devalue currency. This would potentially risk trapping an independent Scotland in uncompetitive feedback-loop. Unable to devalue, therefore stuck with an overvalued exchange rate. Both of which leading to lower exports and current account deficit.

Again, let us remember recent history in the eurozone. We know that the absence of the ability to devalue poses problems. Eurozone periphery countries have experienced ever since the financial crisis of 2008 the negative consequences of being unable to pursue devaluation to improve competitiveness.

The SNP are proposing exposing a newly independent Scotland to a similar risk and for an indeterminate amount of time. That just isn’t good enough, and the looming new paper on the economics of scexit will need to address it head on or risk being guff and fluff.

This ultimately brings us back to the central question the First Minister has repeatedly failed to answer in her recent interviews:

How long would Sterlingisation last?

There is no point in the SNP being coy about this, a vague indeterminate date will butter nae parsnips. If Sterlingisation is maintained for too long, then the risks of no central bank, no monetary policy control and all the other risks I have outlined all start to come into play.

In short, maintain currency substitution for too long post-independence and you create a slide into economic chaos.

But if you rush to a new independent currency, ending Sterlingisation too soon - and you make the imposition of crippling austerity and cuts unavoidable. After all, in order to launch a new Scottish currency the deficit would need to be brought down and a new currency backed-up substantially to grant it stability as a new currency with no prior history. That all means obscene cuts to public services if Sterlingisation were to be ended quickly to make the books balance for the new currency’s launch.

Given these are the realities of what Nicola Sturgeon and the SNP are proposing, little wonder she was reduced in her interview with Ciaran Jenkins to brexiteer rhetoric of ‘taking control of the levers’ etc. Reach for the rhetoric about ‘taking back control’, much easier than actually addressing the hard economic questions arising from her own policy.

Talking pensions

A wider question about SNP economic policy on pensions also arises at this point. A key stumbling block for the Scottish Government’s currency substitution (Sterlingisation) plans relates to the pensions pickle.

Who pays for the pensions?

The answer to this has been something of a mystery over the years. The line from some in the SNP is that that Scotland would not have to pick up the tab for top-tier items like pensions. According to the Minister for Business, Trade, Tourism and Enterprise Ivan McKee

“People who have paid into the UK state pension would receive that money back from the UK pot.”²

Politicians like McKee and Iain Blackford have long claimed that an independent Scotland would not need to pay pensions. They argue - with a straight face - that an entirely separate country (rUK) would pay for the pensions of a different country. They expect you to believe that there is located somewhere a physical ‘pensions pot’ filled with ‘Scotland’s share’.

However, Nicola Sturgeon has insisted that none of what her own Scottish Government Minister McKee or SNP Westminster Leader Blackford have been claiming is true.

Back in February of this year, following Blackford & McKee’s remarks, the First Minister insisted her party’s pensions policy “position hasn’t changed”.

So what does she say it is?

“I don’t need to clarify. The position is as it was set out in the 2014 white paper. There would be negotiation on all sorts of things when Scotland becomes independent…

…it is for a Scottish Government to be responsible for the payment of pensions but the historic liabilities and assets around pensions, as around other things, will be a matter of negotiation at the point of independence.”³

So, on February 9th 2022 Nicola Sturgeon was accepting the Scottish Government would be “responsible for the payment of pensions” and the “historic liabilities” would be a matter for negotiation.

But earlier in that same week, her Westminster Leader Iain Blackford argued something completely different. Mr Blackford claimed that it was an obligation for the UK Government to meet commitments to pensioners,

“an obligation on the UK Government to meet the commitment to pensioners who have paid National Insurance contributions.⁴

Between the statements in regards to pensions, Iain Blackford and Nicola Sturgeon cannot both be telling us the truth about SNP policy. Their statements are incompatible with each other. So we’re left with the question: who pays for the pensions?

This matters, and not just for those who will depend on a state pension when they become too elderly to continue working. If an independent Scotland had to shoulder the twin burdens of existing state pension liabilities and our share of debt; it renders the economics of scexit less credible.

What to look out for in the new paper

The imminent new independence paper on the economics of scexit will need to undertake some seriously heavy intellectual lifting. Up until now, fundamental questions have been left unanswered:

• how long would we be surrendering the security of controlling our own monetary policy?

• how long would Sterlingisation last?

• who takes on pension liabilities (who pays the pensions)?

If the new paper on the economics of independence is to be taken seriously, it will need to admit to a reality current SNP leaders are refusing to deal with (at least publicly). Namely there is no pensions savings pot. It does not exist. Why? Because pensions are paid for by contributions from today, not yesterday. There is no pensions pot, only liabilities to be shouldered.

Further, if the imminent new paper is to be judged as having any worthwhile contribution on this subject, it will need to explain how long Sterlingisation would last for.

After all, when considering Scotland imports more than it exports to the rest of the UK (rUK), Sterlingisation would mean we would be paying for our imports in pounds. Pounds that would be leaving iScotland’s banking system and staying in the now separate rUK system. Under Sterlingisation we face the reality of literally running out of money, thus having to sell sterling denominated bonds. This would likely mean higher rates of borrowing as financial markets question the sustainability of such an unstable situation.

The coming new paper on the economics of independence will need to carefully delve into how Sterlingisation would work (accepting the downsides to the policy in no uncertain terms) and also outline in detailed form precisely how and when Sterlingisation would be ended. Vagueness and ambiguity on this cannot be tolerated if we are to have a meaningful debate on the merits or demerits of independence.

1. Nicholas Mairs (2018), ‘Independent Scotland should keep Pound indefinitely, says SNP-backed Growth Commission’, PoliticsHome, https://www.politicshome.com/news/article/independent-scotland-should-keep-pound-indefinitely-says-snpbacked-growth-commission

2. David Walker (2022), ‘SNP minister claims UK Government would pay Scots pensions in event of Scexit AGAIN, Scottish Daily Express, https://www.scottishdailyexpress.co.uk/news/politics/snp-minister-claims-uk-government-28180564

3. Joseph Anderson (2022), ‘Sturgeon: 'SNP policy on pensions has not changed'‘, Holyrood, https://www.holyrood.com/news/view,sturgeon-snp-policy-on-pensions-has-not-changed

4. Ibid