Opinion polls suggest Scotland would vote decisively for independence if another referendum were held now. Brexit, which Scots rejected by a thumping majority and Covid-19 have changed the political dynamics since 2014. Put simply, Scotland would rather be inside the European Union with Nicola Sturgeon in charge than outside it with Boris Johnson calling the shots.
That, at least, is how things currently stand. The economic problems an independent Scotland might face, which were crucial in the 55-45% vote to stick with the union six years ago, no longer carry as much weight.
Yet the economic issues have not gone away, as the release last week of the government expenditure and revenue Scotland (Gers) data clearly showed. According to official figures released by the government in Edinburgh public expenditure in the year to April was £15.1bn higher than was taken in taxes. As a result, Scotland ran a notional budget deficit of 8.6% of its national output last year compared with 2.5% for the UK as a whole.
That was the cue for the usual barney about whether Scotland was actually being subsidised by taxpayers in England or whether the Scots were only getting back some of what they were owed after decades in which the UK government has snaffled North Sea oil revenues that should have been going to those living north of the border.
Even so, the Gers data suggest that those campaigning for independence will eventually have to come clean on what sort of macroeconomic policy regime they intend to run. Saying there are plenty of small, successful independent countries is true but beside the point because there are plenty of small unsuccessful ones as well.
Scotland has four options, three of which have been touted in the past and a fourth, the most radical of the lot, which has not.
Option one is for an independent Scotland to continue using the pound and to have its interest rates set by the Bank of England. This is perfectly feasible: there are plenty of countries that use the dollar as their currency and put up with whatever monetary policy the Federal Reserve deems right for the world’s biggest economy even if it doesn’t suit their own situation.
David Cameron’s government said it would not go along with this sort of arrangement back in 2014 and there is no doubt Johnson would say the same in the event of another referendum. Even if Westminster did agree, the downsides are obvious: if the Bank of England decided to raise interest rates, Scotland would simply have to suck it up. Sticking with the pound does, though, seems to be the SNP’s preference.
Option number two – leave the UK and join both the EU and the monetary union bloc – would mean Scotland is no longer a vassal state of England, but it also has its problems. Monetary policy would be set in Frankfurt and be even less attuned to Scotland’s needs. What’s more, there are rules for joining the euro, one of which is that a country applying for membership has to get its public finances in order. A deficit of 8.6% of GDP would not be acceptable, let alone the 26-28% of GDP the Institute for Fiscal Studies thinktank is forecasting for this year.
The next possibility is for Scotland to create its own central bank, issue its own currency and set its own interest rates. For those who think (as Theresa May might put it) that independence means independence this is the only meaningful option. But it would not be cost free, at least in the early years.
That’s because – traditionally at least – it takes time for newly formed states to establish their credibility with the financial markets and they do so by keeping interest rates higher than they otherwise would be and squeezing public spending in order to reduce the budget deficit. Were Sturgeon to appoint a big international figure – Mark Carney, let’s say – to run an independent Scottish central bank this would be the sort of policy he would undoubtedly suggest. The alternative would be capital flight, a run on the currency, a ratcheting up of interest rates and an even more severe dose of austerity.
The only conceivable way for an independent Scotland to avoid pain would be if it adopted modern monetary theory which proved to be the magic bullet its supporters claim. Boiled down to basics, MMT says that countries operating below full employment and with their own central bank should not be deterred from spending money to create jobs because the central bank can be relied upon to print the readies necessary to cover the cost. Only when inflation rises to an unacceptable level should policy be tightened, and then by raising taxes or reining in spending.
Opponents of MMT say this is the road to hyperinflation, and cite Weimar Germany and Robert Mugabe’s Zimbabwe every time the idea is floated. This infuriates MMT supporters, who insist the idea would work but really need a small, newly formed country to give it a try. Scotland would tick a lot of boxes. It has plenty of spare capacity and unfulfilled needs. It runs a sizeable structural budget deficit that is being made worse by low oil prices. Sturgeon is respected and Scots might trust her to know when rising inflation required remedial action.
It is a fantasy, of course. MMT is too radical and risky for the SNP, which is pretty conservative when it comes to the big picture economic stuff. There’s not a chance of Sturgeon embracing MMT, which means that she will have to choose one of the other three options.