The large debts shown by the 2020/1 GERS are temporary and not structural. They do not indicate that Scotland cannot afford to be inedpendent.
Hasn’t the massive borrowing carried out by the UK government and other high-income country governments during the COVID-19 pandemic, and at very low borrowing costs to boot, shown that an independent Scotland need not be concerned about running a large budget deficit? It’s not clear that it does.
First, there is a difference between a temporary surge in borrowing like the UK’s – especially at a time when the household sector is massively boosting its saving – and the large structural deficit that an independent Scotland would start life with. And the UK government has announced a package of tax rises and cuts to previous spending plans which amount to 1.8% of GDP a year by 2025-26 in an attempt to bring the deficit down over time – although the spending totals will almost certainly be revised up in this autumn’s Spending Review.
Second, nearly all of the extra borrowing by the UK government since the pandemic began has effectively been financed by the Bank of England creating additional reserves on which interest is paid at Bank Rate – i.e. currently just 0.1%, as it expanded its programme of ‘quantitative easing’ to boost liquidity and support the economy during the pandemic. The US Federal Reserve and European Central Bank have also carried out similar operations to support their economies. If an independent Scotland were to use the pound informally, as is current SNP policy for the short-term, such monetary financing would unlikely be available to it on the same terms. On the other hand, a separate Scottish currency, the SNP’s preferred option for the longer-term, could come under pressure if Scotland’s public finances were seen as unsustainable by the financial markets, pushing up the cost of any sterling-denominated debt obligations of the Scottish Government, households and businesses. Indeed, one of the six tests the SNP say will guide the decision of when to move to a separate Scottish currency is that the Scottish Government has a “sufficiently strong and credible fiscal position in relation to [its] budget deficit and overall debt level”. Action to reduce Scotland’s deficit is therefore a key part of plans for a new currency that further down the road would give Scotland greater fiscal flexibility.
None of this means that Scotland cannot afford to be independent, nor that there aren’t a range of opportunities for better policy to improve performance and better address Scottish needs and preferences. If such policies can be developed and implemented, this might in the longer-term allow more to be spent on public services and more to be kept in Scottish people’s pockets.