Ahead of Scotland’s 2014 independence referendum, the Scottish National Party (SNP) tried to reassure voters by citing a resurgent economy, a relatively modest budget deficit and the prospect of free trade with both the UK and the EU. However, things look very different now. Brexit means that an independent Scotland in the EU — the SNP government’s goal — would face the prospect of a hard border with England, its most important market.
Moreover, data released in August showed Scotland’s national fiscal deficit climbing to £15billion in the year to April – even before the worst of the coronavirus crisis was felt.
While in the past few months, opinion polls have given “Yes” campaigners a consistent lead over their unionist rivals, experts are now warning that the economic and fiscal difficulties of leaving the UK look substantially greater than they did when voters rejected the idea in 2014.
In an exclusive interview with Express.co.uk, Ronald MacDonald, research professor of macroeconomics and international finance at Glasgow University’s Adam Smith Business School, cast a shadow over the SNP’s plan to retain use of sterling in the early years of independence, rather than introduce a new currency.
Mr MacDonald claimed that under Scottish First Minister Nicola Sturgeon’s economic plan, an independent Scotland would almost immediately go bankrupt.
He explained: “The underlying deficit has not changed too much since last year.
“It went up by half a percent, I think.
“That is not a sustainable deficit in itself.
“So they [the SNP] have argued in the Growth Commission report that they could handle that by having higher growth if they were independent.
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“But they haven’t said how they are going to get it.
“Of course, on top of that you have the coronavirus crisis, which means the deficit going forward. It will probably be somewhere in the 20 percent region or even 30 percent.
“That’s a huge deficit.”
The First Minister’s argument, the macroeconomist noted, seems to be that she can do what other governments are doing, which is to borrow heavily on financial markets at relatively low interest rates.
However, Mr MacDonald claimed there is a huge problem with that.
He continued: “Their strategy for an independent Scotland is to have a relatively long transition period where they continue to use sterling.
“Borrowing in a foreign currency is a very dangerous strategy, particularly if you are borrowing the kind of sums of money they are talking about.
“The reason for that is that if you adopt sterlingisation that is a form of a rigidly fixed exchange rate.
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“The UK has a flexible exchange rate. It means that when you get a shock to the economy, you have some means to adjust the economy to that.
“By adopting the currency of another country you really are fixing your currency against that currency. And you have got no means of adjustment.
“That is not tenable for an independent country.
“I have argued separately it could lead to bankruptcy.
“They haven’t thought through the macroeconomic framework.”
He concluded: “It is a very complex mix and unfortunately that complex mix has not been spelt out to the electorate.
“That is my concern.
“I hope if there is another referendum campaign, people will start putting these arguments to them.”
