George Osborne has ordered his officials to prepare a report on the implications of the Bank of England’s intervention in the referendum currency row.
Bank Governor Paul Carney last week warned an independent Scotland would need to give up some of its national sovereignty to make the SNP plan to keep sharing the pound with the rest of the UK work.
Crucially, Carney also said there would be a need for “tight rules” in any currency union to prevent a Eurozone-style crisis where smaller countries such as Greece racked up huge debts at the expense of more prudent members such as Germany.
The Sunday Post understands Osborne wants civil servants to flesh out any such restrictions on borrowing and debt levels which an independent Scotland could face.
Insiders insist the move is not a step towards pre-negotiation, more a bid to hammer home the consequences of what the SNP is proposing for Scots voters.
Alex Salmond yesterday insisted an independent Scotland would keep full control of taxation. However, critics claim this is not telling the full story as what tax levels are set will be heavily dependent on the rules on debt and borrowing set by any currency alliance with the rest of the UK.
The wider pro-Union campaign plans to ratchet up the issue of which currency Scots would use if there is a Yes vote over the coming weeks.
The drive begins on Tuesday when Chancellor Osborne appears in front of the House of Lords Economic Affairs Committee where he’ll be grilled on the SNP’s monetary union plan.
Mr Salmond yesterday told the Financial Times an independent Scotland would be happy to cede sovereignty on monetary policy, such as setting interest rates, but on fiscal policy it would only have to accept limits on state debt and borrowing.
He said: “This doesn’t cover the rates of taxation. I don’t think there’s any need for that.
“Let’s take Benelux, which existed for 60 years before the Euro. Belgium and Luxembourg had widely differing rates of corporation and personal taxation throughout that successful monetary union.”
The need for rules on debt and borrowing for a currency union was first identified by the Scottish Government’s commission on the economic framework for independence.
They recognised the need for debts and borrowing between Scotland and the what remains of the UK to “not diverge significantly” but still have freedom to “vary taxation and spending”.
Carney raised doubts about working without a significant amount of centrally-held fiscal control.
The need for control is driven by the imbalance between the two economies of any UK currency union, according to Alice Enders, economist with research firm Enders Analysis.
She said: “This would be a currency union where Scotland is very much the junior partner simply because of its size relative to the rest of the UK.
“Carney’s intervention was important but still doesn’t take us past the point the UK Government makes, that it doesn’t think our economy is suited to currency unions.
“And certainly the UK’s economic performance compared to key countries in the Eurozone supports this.
“But if there were some form of agreement in the future then any rules or agreement would have to cover aspects such as debt to GDP ratios and, crucially, enforcement if the rules are broken.
“This is one of the problems which the Eurozone countries are trying to address now, but what power do you have over a wayward member, one that is not hitting the targets? What sanctions can you feasibly impose?”
One interesting dimension to the currency debate which has been lost with all the heat of the last few days was Mr Salmond’s claim that the previous Bank of England governor believed the Treasury would change its views after independence.
The First Minister made public a conversation between himself and Carney’s predecessor, Lord Mervyn King, which he claimed was, “your problem is what the Treasury say now and what they say the day after a Yes vote in the referendum are two entirely different things”.
Tellingly, six days on from that remark, King has not distanced himself from it.
Enjoy the convenience of having The Sunday Post delivered as a digital ePaper straight to your smartphone, tablet or computer.
Subscribe for only £5.49 a month and enjoy all the benefits of the printed paper as a digital replica.
Subscribe