Economists pour scorn on John Swinney’s bank of last resort claim

Under the SNP’s plan, Scotland would continue to use the pound for an undisclosed period without a formal currency union. A separate Scottish currency would be established “as soon as practicable” and a Scottish Central Bank created to take responsibility for financial stability.

For an undisclosed period, therefore, Holyrood would have no control over fiscal policy, meaning Scotland would not be able to meet the conditions for EU membership, leaving it outside both the UK and European Union.

Asked on Wednesday who the lender of last resort would be, Swinney said it would “obviously” remain the Bank of England as long as Scotland used sterling. Asked why the Bank would help in the event of a Scottish-specific financial crisis, he said: “They anchor sterling.”

However, Tony Yates, an expert in macroeconomics who held several senior positions at the Bank of England, said that in the event of Scottish independence the institution’s remit would be to work solely in the interests of what remained of the UK. The absence of a lender of last resort working solely in Scottish interests, he said, would leave Scotland hugely exposed in the event of a financial crash.

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“It wouldn’t be in the UK’s interest to automatically bail out a Scottish bank,” Yates said. “It might do, for selfish reasons, if it would put one of its own institutions into difficulty. But even then, it would only do the minimum. It would be a purely selfish calculation.

“Swinney can’t claim, with any credibility, that under the existing mandate the Bank would do what’s in the best interests of Scottish institutions or Scottish depositors. That doesn’t make any sense at all.

“Given UK politics at the moment, it’s at least plausible that some point in the future would be spent under a populist, nationalist or fairly conservative regime. In that scenario, there might be quite strong political pressure not to do anything and to let Scotland go under. So they might not [agree to a bailout] even if it was in their self-interest.”

Swinney published the 90-page paper days ahead of the SNP conference this weekend. On Saturday he will seek activists’ approval for his plan to secure a new referendum, which he claims will take place if his party wins an outright majority at Holyrood in May.

The plan has proven controversial in some parts of the SNP. Some believe a mandate should be secured on the basis of a majority of votes for all pro-independence parties and rebels will put forward their own proposals at conference.

The paper claims Scottish households could be more than £10,000 better off following independence, based on a calculation on income and inequality levels of countries of similar size. The Scottish currency that would eventually be set up, Swinney said, would not be pegged to sterling, meaning its value could rise or fall against the UK pound.

Yates said this could cause problems for Scottish residents if they held mortgages with English banks, which they would be obliged to pay in British currency. If the Scottish pound were weaker than sterling — the most likely scenario — and they were paid wages in the new Scottish currency, they would find it harder to make repayments.

Asked in summary what he made of the SNP’s fiscal plans for independence, Yates, a former head of monetary policy strategy at the Bank of England, said: “Not a lot.”

He added: “They’re trying to make out that this is not a problem, that it would all be fine. But this is definitely in the category of negatives for them. From a Scottish point of view, you can definitely think of some positives [of independence] — for example, if you don’t like Reform or the Tories. But the economics mostly point to the negatives. Trade barriers would be erected at the border, then there’s currency and fiscal policy.”

There is little detail in the paper about how an independent Scotland would deal with its deficit, which according to figures released by the Scottish government would be the highest in Europe. Asked about income taxes, the first minister said he would not expect them to change significantly from current levels.

Professor Ronald MacDonald of Glasgow University’s Adam Smith Business School said that in his view, keeping the pound after independence would mean unprecedented austerity and “crippling high borrowing rates”.

This was due to the need to raise the money in sterling every year to meet its annual balance of payments deficit, which currently stands at about £22 billion. In reality, he claimed, Scotland would have to shift to its own currency quickly, though this would be “sharply devalued” compared with sterling, he told the Telegraph.

David Phillips, of the independent Institute for Fiscal Studies, said the independence paper rightly highlighted the success of other small European nations but “ducks a realistic discussion about transition, not least on tax and spending”.

He said of the paper: “It does not engage at all with Scotland’s fiscal figures. Even with a lower share of debt spending, lower defence spending and so on, Scotland would start life with a bigger budget deficit than the UK. Action would very likely be needed to address this: some combination of tax rises and spending cuts, phased over a few years.

“I don’t think its credible to argue that a reckoning with Scotland’s public finance position could be postponed and tough choices could be avoided in the early years of independence. A more rigorous approach would be needed to make independence a success.”