A NEWLY independent Scotland would face years of deep public spending cuts as it was forced to drive down its deficit with only limited borrowing options, a leading thinktank has said.

In two new papers on currency and borrowing outside the UK, the Institute for Government (IfG) said Scotland was likely to have to run a “tighter fiscal policy than the position that it would be likely to inherit on day one”.

The IfG said an independent Scotland would “struggle” to borrow much more than 3 per cent of its GDP a year, requiring it find an extra £6.5bn to £8.5bn a year in higher tax or spending cuts.

As a country without a track record in the financial markets, its borrowing costs would be 0.4 to 0.9 points higher than UK rates, a premium equivalent to around 2p on every rate of income tax.

Scotland’s nominal deficit was around 8% of GDP before the pandemic and is now 22%.
The IfG said even an 8% deficit made Scotland “an outlier among international peers”, limiting its borrowing from wary markets. 

To establish its credentials, it would therefore have to implement a “substantial fiscal consolidation - around 5 to 6% of GDP relative to its current position - over the first few years of independence”, depending on its share on inherited debt from the UK.

The resulting “structural changes to the economy would require politically difficult short-term decisions, for example allowing some sectors to decline and people to lose their jobs, as Scotland specialises in other sectors”.  

The IfG said: “These would not be insurmountable challenges for an independent Scotland, but there would be no avoiding difficult economic choices.”

At the 2014 referendum, SNP policy was to share the pound in a formal currency union with the rest of the UK, an idea then Chancellor George Osborne ruled out.

The party’s current policy is to use the pound informally instead, then adopt a new Scottish currency "as soon as practicable", subject to a series of economic tests.

The IfG said the only initial viable options were informal use of sterling or a new currency that floated freely on foreign exchange markets, rather than one pegged to the pound. 

It said that “in the short term at least, using sterling informally may be preferable to launching a new currency”, although it would have downsides, including stopping Scotland using monetary policy to cope with economic shocks, and limiting its ability to bail out banks.

IfG chief economist Gemma Tetlow, author of the report on currency options, said: “Scotland’s currency choice would have far wider implications than just the cash people use in their day-to-day lives – including implications for financial stability, what freedom the government has to use monetary and fiscal policy, how easily businesses can trade with other countries, and the attractiveness of Scotland to foreign investors.

"There is no single best choice, all options would come with trade-offs.”

IfG deputy chief economist Thomas Pope, author of the report on borrowing, added: “If Scotland were to become independent, it would struggle to borrow much more than 3% per year consistently in normal (non-crisis) times at a low price from international debt markets.

"This would require a fiscal consolidation of 4%–5% of GDP compared to the pre-coronavirus fiscal position. 

"Even then, Scotland would find it more expensive to borrow than the UK because it would be a smaller country without an established track record. 

“These would not be insurmountable challenges for an independent Scotland, but there would be no avoiding difficult economic choices.”

Pamela Nash, chief executive of Scotland in Union, said: “This exposes the astonishing risk and recklessness of the SNP’s plan to scrap the pound.

“Introducing a new Scottish currency would have devastating consequences for our economy, with a knock-on impact on how much we can spend on hospitals, schools and social care services.

“When our NHS is in crisis and people are waiting hours for ambulances, and we have years of recovery ahead of us following Covid, this proves just how irresponsible the SNP’s separation blueprint really is.

“Individuals would also face higher taxes, as well as uncertainty around their salaries, mortgages and pensions.

“Rather than gamble with people’s futures, the best future for Scotland is as part of the UK so that we can keep the pound and bring people together to build a recovery for everyone.”

SNP MP  Alison Thewliss said: “To imply that Scotland is virtually the only developed economy in the world for which there is no good or viable currency option is a ludicrous suggestion which no one can or should take seriously. 

“Scotland has a fundamentally strong economy but we need the full fiscal and borrowing powers which only independence can deliver to secure a fair and sustainable recovery.”