Why using sterling after independence would be huge strategic mistake
Before moving on to consider how the domestic private sector surplus can be balanced to increase the share taken by the household sector and the poorest deciles in the population, there are some other issues to cover regarding the overseas sector, recognising that the rUK will be part of it once Scotland is independent.
Despite the best efforts of the Scottish Currency Group and others to persuade the Scottish Government and SNP leadership that the introduction of our own currency immediately after independence is critical, it is clear they remain committed to continued use of sterling.
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This is a huge strategic mistake, bearing comparison to Bonnie Prince Charlie's decision at Culloden to take on the Hanoverian army in battle on a bog. To understand why the use of sterling would be a strategic mistake, we need to look again at what GDP is made up of, and why continued use of sterling would adversely affect GDP growth which the SNP sees as the primary goal of economic policy.
GDP=G+I+C+(X-M). This is government spending net of tax, plus private sector investment, plus consumer spending, plus exports minus imports. Without our own currency G cannot grow to any great extent. The SNP are committed to 'balancing the books', which means spend minus tax = zero; G = 0.
They say we will borrow to finance public spending. Such borrowing But this will be in sterling at interest rates set by the Bank of England, UK banks and other institutional investors. Debt repayments and interest will be an outflow from the Scottish economy and a rise in the overseas surplus, benefiting the rest of the UK.
SNP objectives to 'grow the economy' cannot, therefore depend on G. They will depend heavily on I – and much of that would rely on foreign investment, including from the rUK. While this would bring additional capital into the Scottish economy it comes at the cost of an outflow of profits. At present that outflow istotals 6% of GDP – £11bn per year.
Scotland would also need to increase exports to earn the sterling currency to pay the debt, meaning our resources are then allocated to meet demand in the rest of the UK and elsewhere rather than being used to meet the needs of our own people. This cannot be a route to the creation of a wellbeing economy or to the eradication of poverty.
These are the economic characteristics typical of a colony. This would be no more than a constitutional form of independence, not real independence based on political and economic sovereignty.
Choosing to continue to use sterling rather than introduce a Scottish currency would crush our economy, leaving the domestic private sector with a smaller share of the overall non-government sector surplus.
Continued use of sterling for anything more than a few weeks after independence would deliver austerity on steroids.
Of course, the Unionists know this. They need say nor do nothing – they can just wait for the SNP to walk into a trap of their own making. As in 2014 they can, correctly, argue that independence without your own currency isn't independence at all.
While a commitment to our own currency will prompt 'Project Fear' to argue it will be a 'weak currency', at least then there can be a proper discussion about economic policies, enabled by the currency, that support the value of and confidence in the currency and enable the start of a journey towards a wellbeing economy and the eradication of poverty.
With the benefit of our own currency, Scottish governments would have the capacity to increase G, leading directly to growth in GDP. With no necessity to 'balance the books' tax need not be more than needed to prevent inflation. The only real constraint on G is the availability of resources to bring into productive use – once all resources have been used, more government spending would cause inflation.
The 'deficit' created by spending more than taxing is matched by an equivalent surplus in the non-government sector. The important discussion then is how the non-government sector surplus is shared so that every citizen can benefit from the prosperity and how the resources we have at our disposal are best used to eradicate poverty and increase the wellbeing of all.
Next time, we will return to the subject of how the domestic private sector surplus can be increased and allocated in a more balanced manner between financial, industrial and household sectors, with the goal of reducing inequality and increasing wellbeing.
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