Chancellor’s comments based on ‘incomplete analysis’ says Finance Secretary


  By Martin Kelly
An independent Scotland will continue to use the pound as it is in the best interests of Scotland and the rest of the UK, Scottish Finance Secretary John Swinney has said.
Mr Swinney was responding to UK Chancellor George Osborne’s comments on a currency union after the Conservative Minister listed what he claimed were the conditions under which such an agreement would have to operate.

Using analysis provided by his own Treasury officials, Mr Osborne highlighted  conditions related to banking, fiscal restrictions and monetary freedom which he insisted were not achievable and would prevent a currency union from working.

However in a statement issued this evening, the Finance Secretary said the Treasury analysis had been developed without any discussion with the Scottish Government – and without acknowledging the independent expert work of the Fiscal Commission Working Group (FCWG).

The Scottish Government last year published comprehensive analysis of the different currency options available to an independent Scotland. This analysis by the Fiscal Commission Working Group, comprising of four pre-eminent economists including two Nobel laureates, considered the full range of options and concluded that a monetary union would be in the best interests of Scotland and the rest of the UK.

The Fiscal Commission provided advice on:

  • Banking union
  • Risk sharing
  • Monetary and exchange rate policy
  • Duration of a currency union

Mr Swinney revealed that the HM Treasury had no discussion with the Scottish Government on any of these points.

Responding comments contained in the Chancellor’s speech this morning, Mr Swinney said:

“We welcome the opportunity to continue the debate with the Chancellor on the merits of our proposals on a currency union.

“However the Chancellor made clear his conclusions on currency union were based on the advice of Treasury officials. That advice is incomplete and with regard to the size of the Scottish financial sector and operation of monetary unions is backward looking and takes no account of the comprehensive evidence provided by the independent economic experts of the Fiscal Commission, including two Nobel laureates, Professor James Mirrlees and Professor Joseph Stiglitz.

“On every one of the four points the Chancellor rehearsed today, the FCWG have already published comprehensive advice and analysis and their proposed macroeconomic framework is a workable model that would ensure financial stability and allow both governments autonomy over economic and social policies, including fiscal policy.  In addition the Governor of the Bank of England has confirmed the Bank will deliver a currency union if agreed by both Governments.

“On the banking union: no country should have to bail out banks again.  Across the EU and UK recent regulation has been designed to break the link between taxpayers and banks.  The Treasury hugely overstates the size of the banking sector in Scotland which is in line with the rest of the UK.  It is the City of London which is hugely reliant on the financial services sector, accounting for 50 per cent of UK financial services GVA.  A banking union with an independent Scotland is in the interests of the rest of the UK as the sector benefits from integrated trade.

The size of the Scottish financial services sector as a proportion of the overall onshore Scottish economy is 8.0% – similar to the UK – and smaller than the UK at 6.9% when a geographical share of oil and gas output is included.

UK analysis overstates the size of the banking sector in Scotland – To obtain a figure of £1.89 trillion (equivalent to over 12 times the size of the economy) a large proportion of the assets ‘allocated’ to Scotland relate to activity based in London.  This activity would not, under the UK Government’s existing plans to split retail and investment banking, be covered by any future government bail out.

In a recent statistical publication, HMRC estimated Scotland’s share of the Bank Levy (a charge on the balance sheets of banks) to be 7.3% of the UK total.  This is 1/3 of the 25% required to be consistent with this analysis by HM Treasury.

Mr Swinney added: “On fiscal risk sharing: Scotland’s fiscal position is stronger than that of the UK.  An independent Scotland would have had the opportunity to spend more, tax less, invest in an oil fund and still borrow proportionally less than the UK.  The Fiscal Commission proposition ensures a harmonised system for financial regulation and resolution of banks.  Scotland would take its fair share of responsibility recognising that ‘both Scotland and the UK have a shared interest in ensuring financial stability’.

“On monetary and exchange rate policy: Scotland would have full fiscal and economic freedom to set taxes and economic policy, as has been shown by many countries in the different currency unions which have operated internationally.

“And on permanence; all Sovereign states have the ability to determine currency arrangements that are appropriate for their circumstances. That is not a barrier to successful currency unions.”

Mr Swinney also suggested the comments from Mr Osborne had not been in keeping with the agreement signed by both administrations in Edinburgh.  The Scottish Finance Secretary suggested talks between both parties would help resolve any differences.

He concluded: “The model proposed by the Fiscal Commission Working Group has not been considered and the Chancellor’s statement today is political and completely counter to the spirit of the Edinburgh Agreement, which commits both Governments to working in the best interests of both countries whatever the result of the referendum.

“If the UK Government is to honour its commitment to the terms of the Edinburgh Agreement, the discussion that the Chancellor has entered into today must be informed by the best evidence available. The Fiscal Commission have recommended early engagement between the Scottish and UK Government to properly address these critical issues. The gaps in the Chancellor’s analysis demonstrates the force of that recommendation.”