The decision to leave the EU changes terms of debate north of the border, writes Nicholas Macpherson
The EU referendum
last month has raised existential issues of nationality across the British Isles. Applications for Irish passports are at a record level, with even Ian Paisley Jr
, the Democratic Unionist MP, tweeting: “My advice is if you are entitled to [a] second passport then take one.” Meanwhile, the pressure for another referendum on Scottish independence is mounting.
With the UK leaving the EU, there is a golden opportunity for proponents of Scottish independence to reappraise their economic prospectus. Clearly, membership of the EU will lie at the heart of it. That will enable Scotland
to have access to the biggest market in the world without the uncertainties that are likely to face the rest of the UK for many years to come. It would also provide a historic opportunity for Edinburgh to develop further as a financial centre, as London-based institutions hedge their bets on the location of staff and activities. If Royal Bank of Scotland, the state-backed bank, relocates its headquarters as part of that process, that would strengthen the long-term sustainability of the Scottish financial sector.
How quickly an independent Scotland could join the EU is of course highly uncertain. Spain
is unlikely to agree to automatic membership because of concerns about secessionist pressures in Catalonia. All the same, the EU has a huge interest in fast-tracking membership for a country whose citizens have been members of the bloc for 43 years and have voted to remain by 62 per cent to 38 per cent. Then there is the question of currency. In the run-up to the 2014 independence referendum, the Scottish National party government missed a trick by advocating a unilateral monetary union between an independent Scotland and the rest of the UK. The Treasury had had enough problems with fixed currency regimes in the 20th century without wanting to enter into one in the 21st. The history of monetary unions teaches us that they require more political integration rather than less — as the eurozone has discovered to its cost.
In any case, an independent Scotland would have no interest in seeking to tie its currency to a country that wishes to put more distance between itself and the EU. It is surely time, therefore, for the Scottish government to commit to creating a Scottish pound supported by its own central bank. That would not preclude the monetary authorities of an independent Scotland from shadowing sterling, just as the Danish central bank shadows the euro.
In the longer term, there could be a case for tying the Scottish pound to the euro. And a long-term commitment to joining the single currency would almost certainly be a requirement of EU membership. But that does not mean Scotland would have to adopt the euro — at least not straight away. Sweden is theoretically obliged to join the single currency. But more than 20 years on from joining the EU, the prospects of its giving up the krona seem vanishingly remote.
One of the Treasury’s worries in 2014 about the putative monetary union between an independent Scotland and the rest of the UK was the impact of the oil price cycle. With its own currency, Scotland would be much better placed to respond to an oil shock on the scale of the one that has taken place in the past two years. Interest rates and the Scottish pound could take the strain smoothing any adjustment in the real economy.
The fall in the
from $100 a barrel to under $40 earlier this year is a reminder of the importance of sound public finances. There is no reason why small countries cannot be very successful economically. But generally those that are — Norway and Singapore come to mind — put great effort into establishing fiscal credibility. That generally means running fiscal surpluses in the good times, the better to insure against shocks in the bad times.
The Treasury was concerned in 2014 that the Scottish government’s prospectus relied on over-optimistic oil price projections. But First Minister Nicola Sturgeon’s administration has since worked to bolster its fiscal credibility.
John Swinney, Scottish finance secretary
until earlier this year, was cautious about using the borrowing powers available under the existing fiscal arrangements. More importantly, he has taken steps to set up Scotland’s own independent fiscal council. There is now a much better opportunity for informed debate about public finances, taking into account changing North Sea oil production levels and wider demographic trends. The Scottish government can strengthen its credibility by setting out long-term plans for public services, public investment and social security, in particular pensions.
It also has a chance to set out a tax policy for the longer term. An independent Scotland committed to the EU would have an extraordinary opportunity to attract inward investment as well as highly skilled migrants. But, since it will be competing with Ireland, it needs a tax system that is equally competitive. That points to low corporate taxes and keeping marginal rates of income tax down. It may also point to a smaller, more efficient state.
The aftermath of the EU referendum contains many lessons. Perhaps the most important is that without a plan for what happens next you risk months, if not years, of uncertainty and drift. The Scottish government is in a unique position to take a more far-sighted approach. If it can develop a clear and coherent economic strategy ahead of any future referendum, it not only stands a better chance of winning it will also increase the probability that an independent Scotland inside the EU can hit the ground running.
The writer was permanent secretary to the Treasury and is now visiting professor at King’s College London