Would an independent Scotland have to keep the pound and cut public spending?

“But the report suggested Scotland would have to make public expenditure reductions. And also keep the pound. That was a line I read.”

Kwasi Kwarteng MP, 31 May 2018

The Scottish National Party’s Sustainable Growth Commission was set up to consider the implications for the Scottish economy and finances of different scenarios in the event of independence.

It did say that Scotland should keep the pound at least for a transition period. It did not say that Scotland would have to make public expenditure reductions, something another panellist pointed out during the show.

Public spending according to the Sustainable Growth Commission

The Commision sets out its stall saying “Our public finances can be put right sustainably from the unsustainable position we inherit from the UK system at present. And we can do so in a way that continues to grow public spending while stewarding the growth position of the economy”.

We asked Kwasi Kwarteng what he meant and he highlighted the Commission’s view that an independent Scotland should take or inherit responsibility for a share of the UK’s national debt. He pointed to reports of some former nationalists interpreting this to mean that fiscal discipline or austerity would be practised.

Reducing the deficit in the UK public spending has been associated with significant reductions known as austerity, and at least one independence campaigner has reportedly rejected the Commission’s report on the basis that it would lead to “painful cuts”.

This is not what the Commission thinks.

The Commission says that an independent Scotland should limit its public spending to reduce its deficit. It says that spending should be “sufficiently less than GDP growth over the business cycle to reduce the deficit to below 3% within 5 to 10 years”.

At the same time it says that public spending could still continue to grow while following that rule if the Scottish economy grows in line with current trends.

So that is the unknown: if the Scottish economy grew fast enough after independence, then it could increase public spending and reduce its deficit. If it doesn’t, there would be choices between a larger deficit (and so, the independent Scotland’s debt increasing faster), reduced public spending, or higher tax.

The report doesn’t rule out an independent Scotland leaving the pound, but says it shouldn’t happen overnight

“The Commission recommends that Scotland keep the pound “for a possibly extended transition period”. Moving to a new currency would be “based on a governance process and criteria set out clearly in advance of voters making a decision on independence.” While still part of the pound, Scotland wouldn’t be able to set its own monetary policy (things like setting interest rates), which would still be done by the Bank of England.

Any transition to an independent currency would require a “financial infrastructure” to be developed, and happen when it was “appropriate for the Scottish economy”, according to the Commission.