A truly independent Scotland will need its own currency

An email arrives from a concerned reader. He lives in Scotland and he wonders what will happen to him if the residents of Scotland decide to vote for independence a year from now. Will there be different currencies and, if so, which one will his (English) pension be denominated in?

And what about his online bank accounts? Who will regulate them? Will he be able to hold two currencies in them? He isn’t the only one asking – and there are other questions. Will those who might end up financially based in a new Scotland still have self-invested personal pension schemes (Sipps) and individual savings accounts (Isas)? If they have an English pension, but live in Scotland, will they still get to take 25% of their fund tax-free?

What if they have a Scottish pension, but live in England? If they have a mortgage with a bank in England, will they end up with a risky foreign currency mortgage? And if they earn in England, but live in Scotland (at least one train an hour leaves Edinburgh for London every day and they are mostly full), to whom will they pay tax?

These are tricky questions. Perhaps, says our correspondent hopefully, we can “shed some light” on the answers. Would that we could.

Will Scotland end up with its own currency? If it wants to be truly independent, the answer to that is yes. One of the main cases for independence is, as Alex Salmond, Scotland’s first minister and leader of the Scottish National Party (SNP), put it, that it gives Scotland the “the ability to make choices”.

But if there is one thing that everyone has learnt from the bottomless pit of political misery that is Europe, it is that you can’t share a currency – and hence a monetary policy – and not share a fiscal policy. And financial freedom for a country is all about fiscal policy – how much to spend, how much to borrow and so on. So an independent Scotland that kept the pound would be constrained in much the same way as Alex Salmond feels it is at the moment.

Convenience would mean (I think) that Scotland would keep the pound at first. After that, it might decide to hitch its wagon to the euro just for the fun of experiencing another form of fiscal slavery, or it might go for real independence and have a currency of its own. If it does, it might peg it to the pound or the euro (rather as Denmark does) to give it a mix of perceived stability and perceived flexibility at the same time. Or it might just let it float. If so, then we can expect bureaux de changes to spring up along Hadrian’s Wall. That’s irritating, but I’m not sure it’s a particularly big deal in itself.

What is a big deal is that without the backstop of the Bank of England, it is impossible to tell what interest rates in Scotland would be – and hence to have any idea what mortgage rates will be. Mortgage rates will rise everywhere at some point in the coming decade. Would they rise more in an independent Scotland? It seems likely, given that the Scots have no history of efficiently issuing and then paying back debt. But it isn’t a dead cert. The same goes for loan rates, annuity rates and savings rates. We just don’t know.

The regulatory environment is also a big deal. Alex Salmond has said in the past that the financial industry in Scotland can continue to be regulated by the UK authorities. This isn’t really possible with an independent currency. So how would Scottish regulation work? Don’t know. There are plenty of regulatory models to choose from. None appears to work very well, so I guess the good news is that Scotland is unlikely to dream up something worse than everyone else.

On to taxes. There’s an easy bit here – where will you pay? You pay in the country in which you live, not the one in which you earn. We can (surely?) assume that the rump of the UK and Scotland would come up with a reciprocal tax deal of some kind, but in the end, you would pay the rates attached to your residency. The harder bit is what those rates will be.

The only thing I can tell you for (almost) certain is that they will probably be higher for high-earning readers. The nationalists talk a big game on redistribution and fairness, and like to hint at wealth taxes. So you can expect a bigger bill overall. Maybe higher-rate income tax will go up; maybe the 25% tax-free lump sum from pensions will be slashed; maybe there will be a one-off tax on pension savings or Isa savings; or maybe there will be a new super council tax.

However, I can’t see the total bill being too much bigger. The SNP spends a lot of time looking longingly at Scandinavia, so it will have noticed that a good many of the high earners who work in Copenhagen actually live across the bridge in Malmö where property taxes are markedly lower than they are at home.

I doubt this article will have cleared things up that much for our Scottish readers, so let me just chuck one last confuser into the mix. Much of what information we do have on what might – or might not – happen in an independent Scotland is handed out by the SNP. But elections to the Scottish parliament are due in 2016, not long after the referendum. Who can say that the SNP will win?

Finally, should you bother worrying about all these things at all? Most of them, probably not. The polls make it clear that the SNP has several Arthur’s Seats to climb to win this one. In the end, most people prefer the certainty of the status quo to the uncertainty of a brave new world.

But taxes are a different matter. In 2016, Scotland will take control over its own income taxes, which will be deducted at source via PAYE for anyone resident in Scotland, irrespective of where they work in the UK. Those rates, says HM Revenue & Customs, “may be higher or lower than, or the same as those which apply in the rest of the UK”. So now you know.

• This article was first published in the Financial Times.

  • Les.W

    It is amazing that you can confess that well, really you do not know anything with any certainty. You assume Scots cannot think for themselves.
    You manage to actually pour scorn on the ability of Scots to sort out their own ways forward. Full of negativity, which is the normal for all Unionists, and why due to previous similar articles, I no longer subscribe to your publication.

    My question is, this why does the Union REALLY want to keep Scotland fettered to a Union that no longer works for us..

    It is all solvable, just stop all the negatives and let us go, and let us all continue to be good neighbors and friends. What is wrong with that, what does the Union fear. I do not know!

  • r

    That is an interesting response! I read Merryn’s article and thought that all of the issues that she raised are issues that will have to be sorted out if Scotland gains independence. Personally, I am English and I don’t really care whether Scotland remains in the union or goes independent; in fact, it will probably be better for us if she does go independent. Certainly, I think that any country that is “tied” to another should have the right to be independent if that is what the majority of the population demands.

    Why is this Scot being so defensive on the issue? Is there a weakness there? His final comment is absolutely correct in that we will need to have a co-operative relationship after independence which will leave him and Scotland to adopt American spelling as well (if they so wish)!


  • Les.W

    In reply to the above,if you want the absolute truth, I and very many others are heartily fed up about the way the Press and of course the BBC are totally bias against Scottish Independence. While most in England will not see it, but there is a huge amount of lies, manipulation of stats, etc pouring onto Scotland every day of the week. As I said you will see this rarely.

    We are treated like idiots because we dare challenge the rights of Westminster over us, in reality we have a government we did not vote for, imposing it’s will upon us with no mandate to do so.
    There is one Tory MP in Scotland, yes, one!
    No other country in the world would stand for it. Adopting American spelling as your lame comments says, will be well worth it.

  • David McGee

    I have another question, What proportion of the national debt will Scotland be taking with it if it goes independent? Are the Scottish voters being told how that debt will be serviced?

  • Natalie

    I assume that the 85% ownership of RBS will be taken on by the Scottish Government as well. I wonder how much they’ll pay the government of England, Wales and Northern Ireland for it?

  • Les.W

    I do not understand where you come to 85% comes from at all? If you are somehow thinking about the bailout costs of RBS, then of course you are wrong.
    This is a myth portrayed by many journalists of the UK media.
    The facts are, that the country where the contract is undertaken becomes accountable to a proportional cost of the bailout. This is why the USA made a big contribution to the RBS bailout,as did others.

    Similarly, should Scotland become independent then they would become liable for a proportion of all UK debt, to the tune of around 9%, being around that as the Population share of said debt.
    This however is dependent on the rUK sharing UK assets by the same percentage. If they did not wish to do that then Scotland would not, under International law, be obliged to accept any UK debt.

    Referring back to RBS situation, I should perhaps softly remind you that it was the lax governance of the UK financial Institutions that caused the whole meltdown. It can be fairly argued that this was the fault of the government then in power, and those job it was to safeguard against such problems, the didn’t.

    While you may or may not like the idea of a Nationalist government in Edinburgh, they have however over the last six years,governed Scotland better than it ever has been.
    With only one Tory MP, in the whole of Scotland ( yes,we really do have more Panda’s than Tory Mp’s !)
    Is it at all surprising that the Union does not work for us anymore.So please be more aware of what is and has gone on here.

    I suggest you ask how you would feel if these two items, with far reaching consequences were perpetrated against the people of England. (Where, by the way I have very many good friends AND Family.)

    useful reading – The McCrone report (google it ) and the more recent comments by Dennis Healey in ref to Scottish oil ( google it )

  • Les.W

    David McGee
    I have answered your question within Natalie’s question.

  • 4caster

    Scotland cannot be truly independent without her own currency, as many countries in the eurozone have shown. The Republic of Ireland for some decades fixed its exchange rate with the pound, but the Irish Punt was never accepted at par in the UK. She abandoned the fixed exchange rate after Harold Wilson devalued the pound (in our pocket) in 1967.
    Scotland will need her own currency, and she might as well call it the Pound Stirling.