Question 1

Is Scotland subsidised by taxpayers from the rest of the UK?

Accepted Answer

No. UK government spending does not come from taxpayers, but is instead newly spent currency from the central bank - the Bank of England. The Bank of England electronically adds new currency to all the relevant government accounts, in line with what the UK parliament has passed in the budget that year. UK legislation mandates that the Bank of England can never refuse to finance government spending.

This same process applies to all countries that have their own central bank and currencies (monetarily sovereign), such as Norway, Japan, Denmark, Canada, Sweden, Australia, and the United States. Rather than spending "taxpayers money", monetarily sovereign governments are spending "public money".

Question 2

Where would an independent Scotland get the money from?

Accepted Answer

Right now the Scottish Parliament receives newly created currency from the Bank of England, not taxpayers. If Scotland became independent, we could replace the conditions and mechanisms of the Bank of England with our very own central bank.

Countries with their own currency and central bank use the S(TAB) framework – spending precedes taxation and borrowing. This framework describes how modern day governments spend first by crediting currency into relevant bank accounts, which is then followed by taxation and borrowing.

Like the UK central bank, and other monetary sovereign countries across the world, an independent Scotland would create new currency to support the Scottish economy. An independent Scotland would not be financially constrained to develop progressive policy, as it is now under devolution. Constraints on how much an independent Scotland could spend would come from real resources such as labour, education, infrastructure, technology, natural resources and avoiding inflation.

Question 3

Is all UK government spending really just newly created money?

Accepted Answer

Yes. To better understand why this is the case we can break down the accounting model of the UK exchequer to explain how the monetary system really works.

Government spending starts off in Westminster, where our politicians debate the allocation of money between each government department. Every government department holds their own account called a “Resource Account” with the Government Banking Service (GBS), where they receive their allocation of “Exchequer credits”. These credits represent how much each department can spend, so are neither commercial bank money nor central bank reserves. Exchequer credits are simply a ledger balance internal to HM Government.

After parliament has legislated on spending plans, HM Treasury is subsequently authorised to requisition sums of money from the Comptroller and Auditor General (C&AG). The C&AG will scrutinise HM Treasury’s requisitions and then contact the Bank of England to credit government departments – writing off the exchequer credits.

The Bankers' Automated Clearing System (BACS) are then contacted by the GBS to provide banking transmission services. The government department’s Resource Account acts just like a normal bank account. The government department will present its payment requirements to its GBS bank, which are then submitted into the BACS system for clearing and settlement.

The Bank of England then issues funds from the Consolidated Fund to credit the GBS Supply Account. Importantly, the Consolidated Fund begins each business day with a zero balance. No funds are drawn upon, as instead it goes overdrawn as the Bank of England extends intra-day credit. This credit is Bank of England Money - public money.

When settlement is required for payments, the GBS Supply Account feeds sums of Bank of England money into the GBS Drawing Account. Therefore, the GBS Drawing Account has a money balance to settle any required payments. After three days from the BACS submission, the clearing and settlement of the government payments occurs by both the GBS Resource Accounts of the government departments whilst the GBS Drawing Account is marked down. At the same time, Reserve Accounts at commercial banks held at the Bank of England and commercial bank deposit accounts of customers are marked up.

So where does Scotland fit into all of this? The Scottish government has its own Consolidated Fund Account within the GBS. Spending mechanisms for the Scottish government’s account is like that of other government departments, except its allocation of credit is determined by the Barnett Formula.

The key take away is that the money in these accounts is not taxpayer’s money from other parts of the UK, but rather credit that is transferred from the UK Consolidated Fund to devolved accounts - as long as parliament has authorised it.

These same findings were also found by researchers at the UCL Institute for Innovation and Public Purpose and the Gower Initiative of Modern Money Studies.

Question 4

If all government spending is newly created money, why bother with taxation?

Accepted Answer

First, taxes help to avoid high inflation. To avoid too much currency circulating in our economy, taxes remove a proportion of this currency and deletes it. Therefore, tax can be used as an anti-inflationary tool.

Second, tax helps alter social behaviour. For example the minimum pricing on alcohol in Scotland has lead to a decrease in alcohol sales to reduce excessive drinking. What other taxes an independent Scotland uses to change social behaviours will depend on the political parties we vote for.

Thirdly, tax creates better equity. We do not need to tax the rich to pay for public services. Instead, we need to tax the rich because they are too rich. They can use their wealth to lobby politicians to implement damaging policies, or invest in markets that increase prices and lock out low-income consumers. By increasing taxes at the top, and reducing taxes for low-income families, we can build a more equal society.

Finally, taxes also give a currency its value. Everyone who will pay tax in an independent Scotland can only do so with the domestic currency. You cannot pay your taxes with gold, silver, euros, dollars, or yen. You will need to pay your tax in a new Scottish currency. Therefore the demand for a new Scottish currency will give it value.

Question 5

Would a government deficit economically harm an independent Scotland?

Accepted Answer

No. One of the major problems when discussing economics and Scottish independence is the narrow focus on just one sector of the economy, that being the government sector. Political and economic commentators often ignore, intentionally or mistakenly, two other vital sectors that must be included in any serious analysis of Scotland’s fiscal position – the private and foreign sector. Ignoring these other sectors is the equivalent to describing a football match as “Celtic – 1” without any commentary on the other team. Therefore, the best accounting framework to analyse these sectors is the Stock-Flow Consistent (SFC) model by British economist Wynne Godley.

When considering all sectors of the economy, the SFC model presents an accurate and detailed account of all flows and stocks in the economy. This framework means the net sum of all equity of the economy is equal to zero (whilst equity remains). An example of a Sectoral Balance sheet is seen below.

When the government sector is in a deficit, this means the private sector is in a surplus. Both sectors effectively mirror one another. A private sector surplus is a result of increased net-financial assets in our pockets from government spending. With this income we go on to spend it into other areas of the private sector. Our spending becomes the income of businesses, who use these net-financial assets to expand projects and production. This in turn can generate more jobs and economic growth. If our resources are being utilised, a private sector surplus creates a stable and functioning economy.

Government deficits are entirely normal and necessary to maintain a healthy and stable economy. This is the same conclusion reached by Economics Professor Eric Tymoigne, who writes in his paper “Debunking the Public Debt and Deficit Rhetoric”:

“If a growing public debt is so concerning to some, it is because it is supposed to raise interest rates, slow economic growth, raise inflation, and raise tax rates. Even a casual look at the evidence shows that these concerns are not warranted and that prior beliefs should be reversed. Deficits help to stabilize the economy, deficits do not raise interest rates, deficits are not necessarily inflationary, and a rising public debt does not lead to higher tax rates. The public debt and fiscal deficits provide several benefits to the rest of the economy.”

On the contrary, the evidence tells us that when countries attempt to reduce the government deficit, this leads to increasing instability and economic recessions.

If the government wishes to run a small surplus, this will push the private sector into a deficit – reducing its size and suppressing economic activity. If a business or individual wants to spend beyond their income, they will either reduce their spending, sell their assets or borrow from commercial banks. Reducing spending will result in declining revenue streams for many within the private sector, whilst borrowing from commercial banks will result in growing private debt that will need to be paid by with interest.

Current data suggests that under the UK economic model, private household debt is dangerously increasing in Scotland, with inflation hitting 13% and a recession just around the corner.

Question 6

Would the national debt be economically harmful for an independent Scotland?

Accepted Answer

No. Politicians often use the national debt to spread hysteria of economic collapse, citing trillions of pounds in which we owe to unknown forces. We are told that this will be a burden on future generations, therefore we must implement austerity now and severely reduce public services.

In reality, the public debt is actually a historical record of all the currency the government has added to people's pockets without taxing them away. All the currency you have in your bank accounts, pockets, under your cushion, and stashed in glass jars is part of the national debt. To families and households in the private sector, the national debt is our national savings that we need to run a healthy economy. Every time the government runs a budget deficit, it is adding to our collective savings. Because government spending is a net-financial asset, it never needs to be paid back.

When politicians say they want to completely wipe out the national debt, they are effectively telling voters they want to completely remove our savings. If you want to reduce your share of the national debt, you can simply rip or burn the currency notes you have in your pockets right now. Yet you may find it more difficult to meet payments on rent, mortgages, energy bills, tax, and your weekly shopping.

Historic data demonstrates that governments who attempt to ‘balance’ their budgets to reduce government debt have subsequently taken their economies into significant periods of depression. This fact is best presented in Frederick C. Thayer’s paper “Balanced Budgets and Depressions”, looking at the US national debt since 1791. His findings revealed the national debt increased in 112 years and decreased in 94 years. For most years that have seen balanced budgets and debt reduction there has followed economic depressions.

The national debt (national savings) is also government bonds/gilts, which you can read more about in our government borrowing questions. People will swap their regular currency for interest-bearing currency because the government is the safest place to save with. Private pension funds will place their currency into government bonds/gilts so they can guarantee those who retire receive their pension payments. If politicians seriously wanted to wipe out the national debt, they would be putting private pensions into jeopardy.

An independent Scotland that builds up national savings, in its own currency, would be financially supporting current and future generations. As our productivity and population grows, so too must our national savings.

Question 7

Would an independent Scotland have to borrow from the rest of the UK?

Accepted Answer

No. The UK is Scotland’s largest trading partner, and Scotland is in the top three of the UK’s biggest trading partner. Our limited trading data suggests that the UK has a trade surplus with Scotland (meaning we are a net importer). In the case of Scotland being an independent country, we would pay for the UK’s goods in Scottish currency, and those payments would be credited to the UK’s bank account at the Scottish central bank.

The UK (by “UK” we mean individuals and businesses based in the UK) has a few options on what to do with the Scottish currency. The UK could sit on the currency or use them to invest/purchase more Scottish goods. But if the UK sat on  Scottish currency they would not be earning interest on them.

What the UK is most likely to do is simply shift their Scottish currency into a savings account at the Scottish central bank. This is done with the UK purchasing Scottish bonds. This is simply an accounting adjustment.

The Scottish central bank simply subtracts numbers from the UK’s current (reserve) account and adds those numbers to its savings (security) account. The Scottish currency will still be sitting there, but now the UK is holding interest-bearing currency instead of regular currency. To pay back the UK, the Scottish central bank will simply reverse these accounting entries – so the UK’s security account is marked down, and its reserve account is marked up. This is simply done using a keyboard at the Scottish central bank.

This is not "borrowing". The only thing we owe to the UK is a bank statement.

Question 8

Would increasing an independent Scotland's money supply lead to hyperinflation?

Accepted Answer

No. The claim that increasing a country's money supply would be highly inflationary, or even hyperinflationary, is not supported by economic data.

Even the most right wing economists do not believe this. The Mises Institute, a right-wing Libertarian think tank based in the United States, concluded that hyperinflation was caused by "war, political mismanagement, and the transition from a command to market-based economy".

Question 9

Would Scotland end up like Weimar Germany, Zimbabwe, and Venezuela?

Accepted Answer

No. It is a common misunderstanding that Weimar Germany, Zimbabwe and Venezuela faced hyperinflation because of money creation. This is inaccurate, as we will explain below.

At the end of the First World War the UK, Russia, and France had mandated war reparations would be paid by Germany, as laid out through the Treaty of Versailles. All reparation payments had to be paid in foreign currency, meaning Germany had to become incredibly reliant on its exports – which were already devastated from the war. The German government could have increased taxes on the population, whilst shipping off their real resources to the rest of Europe. This would have left German citizens worse off than they already were, whilst their decline in spending potentially leading to further damage to the economy. Therefore, the government did not opt to raise taxes and instead focussed on deficit spending. Germany was paying more money than what they received back.

Between harsh reparations, a devastated economy and growing inflation, Germany was unable to make their debt payments to France. In response French and Belgium troops invaded the Rhur Valley in 1923, one of Germany’s most productive land mases. The French invasion resulted in mass strikes from German workers and saw a further drastic decline in exports to the rest of Europe. Whilst German demand remained the same, its supply and export income had drastically fallen. Germany’s money creation was not the cause of hyperinflation, but rather a symptom in response to declining resources. These events would be key for German far-right groups, in particular the Nazis, rising to power.

Zimbabwe faced similar challenges. Former Zimbabwean President Robert Mugabe pushed for land reform that would redistribute ownership from white Europeans to native Africans in the country. Whilst the aim was noble, the processing in doing so turned into a complete disaster. Political corruption saw land handed to those in positions of political leadership or individuals who never utilised the resources they were given. After the year 2000 the process of occupying land became violent, running out both white and black workers who were experienced in agriculture. This led to the country’s food production to collapse by 73%.

As food production collapsed, Zimbabwe’s infrastructure was so degraded that it struggled to support the country’s exports to the rest of the world. Goods and services also saw a drastic decline coming into the country because of import duties. These imports played a key role to Zimbabwe’s manufacturing sector, as these resources would have been utilised to be exported back to the rest of the world. With exports declining and agriculture devastated, the government eventually decided to lift duties and heavily spend on importing food. Similar to Weimar Germany, Zimbabwe’s demand remained the same, but resources had declined, with Zimbabwe building foreign debt from food imports. The government’s money creation did not cause hyperinflation but was a symptom of declining resources and political corruption.

In the case of Venezuela, hyperinflation was the result of the country’s over-reliance on oil. In the 2010s Venezuela had the largest oil reserves on the planet, making up almost all the country’s exports and half of tax receipts to the government. Whilst the country placed high taxes on oil, it brought forward various public programmes that helped reduce poverty by 20% in less than 10 years. Yet the country’s oil sector suffered mismanagement and a lack of investment, which meant it could never meet its full potential output. Matters were made worse in 2014 when the supply of oil drastically increased in global markets, which saw oil prices plummet by 70% within three years. Venezuela went from a trade surplus of $581 billion to a trade deficit of $625 million. Venezuela was also heavily reliant on food imports, which were significantly reduced when the country’s economy collapsed. The result was high unemployment and hyperinflation.

Scotland is a market diverse and resource rich country that is not vulnerable collapse over market shifts. Our economic infrastructure is highly developed with no risk to political instability. Therefore, Scotland is incredibly unlikely to face similar challenges faced by the three case studies above.

Question 10

Would Scotland leaving the UK currency union be disruptive?

Accepted Answer

Unlikely. Research from Professor Andrew Rose, an expert on international trade patterns and exchange rate determinations, concluded that most countries that leave currency unions are more often larger, richer, and more democratic compared to their counterparts. Further, his research also concluded that around the time a country leaves a currency union there is very little macroeconomic volatility before, during, or afterwards.

Professor Volker Nitsch, Chair of International Economics at Darmstadt University of Technology, also reached similar conclusions. His research found that where there was economic disruptions, they were mainly caused by other factors and not the currency union breakups.

Specific research on an independent Scotland setting up a new currency and central bank has found the transition can be stable. Dr Stuart Mackintosh, Executive Director of the international financial think tank Group of Thirty, concluded that an independent Scotland could manage its own affairs, further stating that a Scottish central bank could be "dynamic, forward-looking and effective."

Dr Alberto Paloni, an economic expert in finance, banking, financial reforms, and the real economy at the Adam Smith Business School, reached similar conclusions and that an independent Scotland could implement a new currency and central bank "rapidly". Further, his analysis also debunked commonly repeated misinformation from anti-independence economist Ronald MacDonald.

Question 11

Would an independent Scotland have to borrow money to support the economy?

Accepted Answer

No. What we describe as "borrowing" for countries with their own currency is better described as "currency swapping".

First things first – what is a bond?

If you buy a bond, the issuer of the bond is making you a promise to pay you a set rate of interest every year and will repay you the original amount you invested at a set date in the future. For example, let’s say we issue you, the reader, a ten-year bond of £100 with an interest of 2%. Each year we would pay you interest, which in total is £2. Then on the last year we would pay you the total bond value with interest, which is £102. Bonds can be issued by some governments and private companies to help fund their investments. But bonds are only useful to raise funds for investment if the institution is a currency user (i.e. they don’t have their own currency and central bank). They must “find the money” in order to expand any projects they have in mind.

If a government with its own currency is issuing bonds, then the operations are coordinated with a central bank. A Scottish central bank would oversee the currency transactions of the Scottish Government. Together they would coordinate the auction of Scottish bonds to financial markets, how many Scottish bonds are on offer and how long they would last. These transactions, along with government spending and taxation, all work smoothly together.

From an outside perspective it looks like an independent Scottish government is collecting Scottish currency from taxpayers and bond buyers in order to raise funds and pay for public spending. But this is not the case.

When a monetarily sovereign government issues bonds, it is simply turning normal currency into interest-bearing currency. This interest-bearing currency will sit in a savings account at the central bank and does not finance any government spending programmes.

There are two markets for selling bonds - the primary market and the secondary market. The primary market is for institutions with large amounts of capital (multinational banks) whilst the second market focuses on pension funds, hedge funds, local government pensions and foreign investors

A monetarily sovereign Scottish government would be the boss when setting conditions for issuing bonds. The primary bond market is established by the Scottish government, which sets the rate of interest on the bonds they issue, whilst markets will bid on the discount rate. The value for a bond should (roughly) equal the expected average of the overnight rate for the lifetime of the bond.

Because bond bidders want access to "Triple A" savings accounts at the Scottish central bank, they will offer rates close to the government target. Those who offer unreasonable rates will lose out on these accounts.

Question 12

Would an independent Scotland be "Greece without the sun"?

Accepted Answer

No. Some have argued that the UK holding Scottish bonds is a danger, since financial markets could sell off our assets in order to drive down the price for Scottish bonds and increase the yield (interest) on them. Those who attempt to force sharp changes in the prices and interest of financial assets are normally referred to as “bond vigilantes”. Many readers may recall in 2016 when the Centre for Policy Studies infamously made the claim that Scotland would be “like Greece without the sun.”

First, since the UK has a trade surplus with Scotland it cannot avoid accepting the Scottish currency. The only possible way to do that would be to flip their trade surplus with Scotland into a trade deficit. This is highly unlikely to happen, especially considering the ideological position of UK parties favours having a trade surplus.

Second, an independent Scotland with its own currency would not be in a situation like Greece. When Greece abandoned the drachma currency in 2001 it also lost its monetary sovereignty to the European Central Bank. This meant that Greece’s debt is redenominated into a currency it is not the monopoly issuer of (i.e. it does not directly control the currency and cannot create it), thus they would be forced to use taxation and bonds to raise funds for government spending. Anyone who did purchase Greek bonds was taking on a risk not faced by countries with their own currency – a default risk. This is because Eurozone countries could literally run out of Euros. When such a risk exists, financial markets will demand a premium when lending to a state that cannot guarantee a return.

With the 2008 financial crisis Greece suffered from job losses, declining tax revenues and a spike in demand for welfare protection. Therefore, Greece was forced to push the country’s government deficit to 15% of GDP in response to the crisis. Greece could not clear all its payments, because it did not control its own central bank. Lenders were unwilling to buy Greek bonds unless they had high interest on them. From 2009 to 2012 Greece’s interest on 10-year government bonds increased from 6% to over 35%.

Meanwhile a monetary sovereign country like the UK did not face the same risks. The UK government deficit increased to 10% of GDP in 2009, but the interest on 10-year government bonds decreased from 3.6% to 1.8%. Such a decrease was similarly seen by most monetary sovereign countries because they had their own central banks to control their own currency. Because monetary sovereign countries can always meet their payments denominated in their own currency, this reassured financial markets that they would see a return when buying bonds.

Financial markets also accept that monetary sovereign countries have control over their interest rates. The main interest rate that central banks focus on is the overnight rate. As Professor of macroeconomics Stephanie Kelton states – “They rigidly fix this rate and then allow longer-term rates to reflect market sentiment about the expected future path of the short-term policy rate. That means that the interest rate that’s paid on the longer-term government bonds is related to the overnight rate that its own central bank is setting.”

Some countries go even further to control their long-term interest rates by setting it near 0%. The Japanese government sold ¥6.9 trillion directly to the Bank of Japan in June of 2019. Japan didn’t achieve this because they used their monetary levers. This is something that all monetary sovereign countries can do.

Whilst financial markets have a bit of influence over the interest rate that monetary sovereign countries must pay on bonds, the government is ultimately the boss. This would be the case if an independent Scotland sets up its very own Scottish central bank and currency.

Question 13

Would an independent Scotland's trade deficit and exchange rate lead to high inflation?

Accepted Answer

No. A Scottish currency with a floating exchange rate would see no measurable effect on domestic inflation. Canada, a small open and developed economy with a floating currency, has seen wild exchange rate fluctuations of 20% for the last twenty years whilst the domestic economy experienced stable inflation, growth, and a gradual decline in unemployment.

Another case study is Australia, which has run a trade deficit (at times twice the size of Scotland’s) for nearly thirty years...

…yet has experienced declining and stable inflation.

Further to this, there is no direct relationship between a country's trade balance and their exchange rate, as demonstrated by Mexico.

A new Scottish currency will not take markets by storm, nor will it crash and burn. Instead, it will simply operate like most floating currencies – underwhelming normal.

Question 14

What would happen to my mortgage in an independent Scotland?

Accepted Answer

Many opponents of independence have suggested that an independent Scotland would put people's mortgages at risk, because providers will simply refuse to accept any new Scottish currency. However, this does not stack up to economic reality.

Millions of mortgages all across Europe were changed from their original currencies to the Euro in 1998. This transition was planned and carried out smoothly, with private institutions respecting the political will and economic change carried out by the state. The suggestion that mortgage conversion is not possible is simply unrealistic.

If a mortgage provider offers a contract in Sterling, but the borrower switches to a new Scottish currency, then the loan the provider has offered becomes a foreign currency loan. From the provider's perspective, this becomes a bigger risk because there is no guarantee the borrower can meet Sterling payments, and the loan is more vulnerable to exchange rate movements.

Private banks would be pressured to find more capital to support their foreign loans, possibly by increasing the interest. However this risks changing the terms of the loan and the borrower not agreeing to them. This becomes an expensive headache for the bank.

Instead, private banks would simply redenominate the mortgage contract, so they can protect their assets and have a steady income of the new Scottish currency. This is less risky and less expensive than a foreign currency loan in Sterling. Providers are incredibly unlikely to drop their mortgages and move out of Scotland, since the move would be completely self-harming to their own loan book.

Under a planned transition, most Scots with a mortgage would barely notice any difference.

Question 15

Would Scotland's trade deficit harm the Scottish economy?

Accepted Answer

No. In real macroeconomic terms, Scotland’s exports are a cost and its imports are a benefit. When Scotland’s real resources, including our labour, are used to produce output to the foreign sector, the domestic sector loses out to either consume or use these resources for investment goods. As Nobel Prize-winning economist Paul Krugman writes: “Running a trade surplus isn’t a ‘win’; if anything, it means that you’re giving the world more than you get, receiving nothing but IOUs in return.”

Therefore, imports mean we accumulate real goods which we do not have to produce. Scotland’s position as net importer places us in an advantageous position of trade.

Producers take greater priority on the income they receive from their services or goods, rather than who purchases them. If a producer sells their goods domestically, they will receive the domestic currency to cover costs for their next sales. If a producer sells their goods into the foreign sector, the buyer will need to exchange their domestic currency for the new Scottish currency. Either way, the seller receives the currency, but when goods and services flow to the foreign sector then the people of Scotland miss out on the fruit of their own labour.

More orthodox economists may counter this argument by pointing out that the previously unutilised resources and the unemployed have, through a trade surplus, found an income. Workers now receive wages and firms increase their profits margins, so what are we complaining about?

Higher government spending can result in increased wages, profit margins and growth – we do not need to ship off our resources to achieve it. Having a domestic growth model better enables Scotland to respond to potential market (domestic or global) shifts which can be potentially damaging and still enjoy the fruits of our labour. Creating jobs and using our resources for domestic consumption results in greater net-benefits than sending our resources abroad.

Question 16

Would Scotland shut itself off from the rest of the world?

Accepted Answer

No, although that is increasingly happening under the current UK economic model. Westminster has cut funding to UNICEF to support children across the globe by 60%, whilst also cutting 85% of its funding to the UN Population Fund's family planning programme. On top of this, billions of pounds worth of aid are still to be cut that would go to humanitarian projects at the UN. Whilst the UK government isolates itself from the rest of the world, an independent Scotland should stand tall on the international stage and proudly commit to supporting humanitarian projects.

Sending resources to countries in need to rebuild communities, develop modern health care and expand education is not only a representation of an independent Scotland’s values, but more importantly it is the morally right thing to do.

Trade is not a competition or a game – it is a power relationship between different interest groups.

An independent Scotland can use policy tools and institutions to increase equality, develop a humane welfare system and reach full employment, whilst still challenging international free-market ideology by supporting humanitarian aid, promoting high ecological standards and focusing on workers’ rights for future international agreements.

An independent Scotland can support developing countries in building public-led industrial policies that produce long-term infrastructure and green technology that is both sustainable and efficient. This technology includes solar panels and wind farms to countries that may lack oil and gas, whilst also building on hydroponics for far warmer countries. This in turn will reduce our carbon footprint as we shift our finances away from extracting fossil fuels that threaten our planet’s long-term survival.

Question 17

Would transaction costs with trade damage the Scottish economy?

Accepted Answer

No. If transaction costs were such a burden, Canada would be lobbying the United States to support the introduction of a North American dollar or surrender monetary sovereignty over to Washington. But instead Canada enjoys monetary sovereignty despite transaction costs. Neither would we expect Ireland, which isn’t monetarily sovereign, to suddenly surrender democratic control to the UK because of transaction costs.

If we look at Eastern European countries with their own currencies, such as Poland, Hungary, and the Czech Republic, we find that they’ve had the fastest growth compared to their Euro colleagues since 2002. The Euro may have removed transaction costs for many European countries, but Euro members also suffer higher levels of unemployment, political instability, and interest rates. Scaremongering about transaction costs simply do not stand up to macroeconomic reality.

Question 18

Would unemployment increase after independence?

Accepted Answer

Not necessarily. Scotland's level of employment and unemployment will depend on the government policies implemented by Holyrood after a Yes vote.

Both the Bank of England and the UK government follow a doctrine known as the "Non-accelerating inflation rate of unemployment" otherwise known as NAIRU. This doctrine proposes that the government must enable a level of unemployment in the economy in order to keep inflation low. Margaret Thatcher most infamously implemented this rule through a mix of brutal austerity and privatisation, resulting in millions of people in unemployment, the near total destruction of productive industries, stagnating wages, and crushing the bargaining power of unions. Thatcher reduced inflation by destroying the lives of millions.

Despite the economic and social suffering that NAIRU represents, it is still a policy favoured by the UK government today. Under the Westminster economic model people living in Scotland are intentionally left in unemployment.

However, economic experts and progressive policy thinkers have developed an alternative to NAIRU known as the "Non-accelerating inflation buffer employment ratio", otherwise called NAIBER. This concept proposes building an economic model that promotes both price stability and full employment within the economy, which would be achieved using a Job Guarantee.

Modern Money Scotland has written two policy papers on the Job Guarantee. The first paper looks at the general concepts and successful case studies involving the Job Guarantee. The second paper looks at how a Job Guarantee could be implemented in an independent Scotland.

The Job Guarantee is favoured by the Scottish National Party and the Scottish Greens, whilst previously being favoured by Scottish Labour. An independent Scotland with a Job Guarantee would not only reduce unemployment, but has the potential to restructure the Scottish economy to be more localised, democratic, productive and environmentally friendly.

Question 19

Would private borrowing from banks harm a Scottish currency's exchange rate?

Accepted Answer

No. It is far too simplistic to suggest anyone can borrow (e.g. a credit line) from commercial banks. Businesses and individuals wishing to borrow will need to be able to meet the terms of conditions, credit risk assessments and wider government regulation, especially if markets will be prudent with a new currency. Businesses will most likely exchange their Sterling to the Scottish currency through the Scottish government since this has the benefit of receiving a premium, likely between 1-3%. Borrowing from commercial banks is zero-sum since the entire loan will need to be paid back with added interest.

For certain businesses and individuals, there is no guarantee that they will receive enough Scottish currency fast enough to pay back their bank loans on time. This would only work if the customer were almost solely the Scottish Government who would be making these payments in the Scottish currency. This does not apply to most businesses.

For businesses that opt for private loans but do not receive enough Scottish currency to meet their obligations, then they will need to use their Sterling reserves to exchange for Scottish currency. They still turn to the Scottish government to meet their self-inflicted debt obligations. Or they can default on their private debt with the added interest. It makes little sense for businesses to increase their financial risks.

The fact the Scottish government would be the most creditworthy body in the whole country would mean businesses could avoid a credit line and opt for a government currency exchange.

For the few businesses that do decide to borrow over currency exchanging, they will not simply sit on Scottish currency and do nothing. They are borrowing to invest. Borrowing to spend is essentially deficit spending and increases aggregate demand. Any suggestion that borrowing will have currency floating around the economy doing nothing should be dismissed.

22% of workers (600,000 people) in Scotland are employed by the public sector. This means there is only a guarantee of one-fifth of Scots to be paid the Scottish currency on day one of its launch, although this could increase with a Scottish Job Guarantee Programme. Any exchange rate fluctuations will depend on the other four-fifths of Scottish workers and the foreign sector receiving the new currency. Let us explore both groups.

If liabilities are to be paid in the new Scottish currency, then for the beginning period of independence the foreign sector is less likely to exchange the new currency for their own domestic one. Rather, the launch of new currencies in developed economies has most often followed with increased foreign direct investment – which would strengthen a new Scottish currency. Businesses, foreign and domestic, would only convert as many of their Sterling currency that is initially needed. This would first be in the form of taxes, then followed by payments surrounding rent, wages, and various other liabilities. There could be a period where both Sterling and the Scottish currency are both accepted, but this would shift clearly in bias towards a new Scottish currency.

The general Scottish population will shift to a new currency much faster than wealthy individuals and big businesses. Economists Richard Marsh and Warren Mosler expect a transition of around 75% of GDP by the end of the first year, which would continue to build up over time.

Question 20

Does MMT only apply to the USA and not Scotland?

Accepted Answer

No. Most of the examples we have cited in our FAQs are from small/medium sized open economies, such as Japan, Sweden, Canada, the UK, Mexico, and Australia. One of the founders of Modern Monetary Theory, Bill Mitchell, is Australian.

The United States of America may be "more sovereign" because of the global influence of the US dollar and the size of its economy. However the rules of monetary accounting are universal, and an independent Scotland can use these accounting rules to the benefit of its population.

Question 21

Would the UK have large influence over Scotland's monetary policy?

Accepted Answer

No.  The only realistic way for the UK to influence an independent Scotland's monetary policy would be if our elected politicians decided to let them. Denmark, similarly sized to Scotland,  pegs its currency to the Euro to stop the Danish Krone from appreciating since Denmark runs a consistent trade surplus. However, this does not apply to Scotland since we are a net importer.

Another similarly sized country to Scotland is Sweden, with its interest rates mirroring that of the European Central Bank. Yet despite this mirror, the respective level of their interest rates are very different - in particular before and after the 2008 financial crisis.

Despite countries such as Sweden, Denmark and Norway having differentiating monetary policy, this doesn't change the fact their economic models share striking similarities. The Nordics share high social expenditure, high public sector employment, strong employment protection, union contracts, state ownership, and more. The economic successes of Nordic countries largely stems from the fact they all have their own currency and central bank.

Question 22

Would Scotland need hundreds of billions in foreign exchange reserves?

Accepted Answer

No. This claim originates from economist and Better Together supporter Ronald MacDonald, who claimed back in 2018 that an independent Scotland would need around one-third of a trillion pounds (£300 billion) of foreign reserves to launch its own currency. This claim is made on the basis that an independent Scotland would need to peg its currency to the UK pound for the short term to avoid drastic price fluctuations.

Firstly, no other country similarly sized to Scotland in the EU with foreign exchange reserves has anything close to that amount. Bulgaria, with a population of under seven million, has foreign reserves of around £28 billion, which is just over 40% of GDP. Other countries more similar to Scotland include Sweden with £45 billion of reserves (7% of GDP) and Denmark with £55 billion (20% of GDP).

Ronald MacDonald’s £300 billion comes from comparing Scotland to Hong Kong, which currently sits on £392 billion in foreign reserves. Yet, MacDonald completely removes context of the hugely hostile relationship between Hong Kong and its neighbour China, with a population of 1.4 billion people. Hongkongers, who have their own sense of identity and culture, have pushed back against aggressive power grabs from the Chinese Communist Party (CCP) who wish to remove their freedom of speech, the right to vote, freedom of the press, and free elections. Hong Kong’s large foreign reserves are largely a defence against an authoritarian power – a political decision to keep monetary policy closer to the US than China. Second to this, Hong Kong also acts as an intermediary between Chinese markets and the rest of the world.

For MacDonald’s £300 billion figure to be even remotely correct, the UK would need to turn into an authoritarian state that would seek to completely destroy the Scottish parliament and our basic human rights.

Question 23

Where would Scotland get its foreign exchange reserves from?

Accepted Answer

An independent Scotland would naturally accumulate foreign reserves in fairly large quantities. First, Scottish citizens would be required to pay taxes (alongside other bills) in the new Scottish currency, thus requiring them to exchange their current Sterling currency for the new currency. This would have the advantage of allowing citizens to obtain a premium (perhaps between 1-3%) and would see gradual increasing demand for the new currency. On top of this, an independent Scotland would be able to accumulate Bank of England coins and notes in circulation for its foreign reserves. Between exchanged Sterling from people's accounts and Sterling notes/coins in circulation, Scotland’s foreign reserves would be starting around £60 billion.

An independent Scotland could exchange around one-third of their Sterling reserves to Euros, Yen, Dollars, Francs, Kronas and more, therefore diversifying its foreign reserves. These levels of reserves of a huge abundance are not necessary for a country our size, especially if the currency has a floating exchange rate.

Question 24

Would an independent Scotland be dependent on foreign exchange reserves?

Accepted Answer

No. Currency reserves are typically used when a currency is pegged to another, however launching a new currency with a peg is economic illiteracy. It would leave a new currency under attack from speculators and waste time and resources on defending the peg. This would also put pressure on the government to sacrifice domestic policy and possibly implement capital controls, which should typically be deployed as a policy tool of last resort. A new Scottish currency should not play speculator’s games and instead allow the currency to float, therefore allowing the currency value to match Scotland’s productivity and domestic costs.

Reserves are very limited in their ability to hold off speculative attacks or sudden fluctuations in the exchange rate. When the UK voted to leave the EU in 2016, the value of the pound fell by 8% overnight, and then fell by a total of 16% over the year. Foreign exchange trading happened electronically by software automatically selling off Sterling assets. Whilst Sterling assets were dropped across the globe, London markets were, quite literally, fast asleep.

The world where foreign exchange markets were mostly done through the telephone or in-person meetings are in the past. In the modern age, regardless of how big our foreign reserves are, technology is one step ahead. As the Bank of England has stated, foreign reserves now take a key role in supporting the financial services industry. Since Scotland’s financial service industry is smaller than that of the rest of the UK, the demand for foreign reserves is less.

At the end of the day, there is no specific target an independent Scotland needs to meet on their foreign currency reserves.

Question 25

How could an independent Scotland tackle inflation?

Accepted Answer

There are various policies an independent Scotland can use to tackle high inflation.

The first solution is for workers across Scotland to receive a real living wage. The UK Government’s current minimum wage is £8.91 an hour, but this is below the real living wage which is calculated at £10 an hour. After a decade of both stagnant and falling wages, a real living wage would allow for more spending in the private sector, allowing for increased growth and employment.

The second policy is a Job Guarantee Programme. Rather than tolerating unemployment, the Job Guarantee would make the government the employer of last resort, offering socially inclusive work and wages to those who seek it. Such a programme would be based on a worker’s democracy model, so that the employment offered would be led by local communities and funded by national government. Further, the Job Guarantee is key to creating price stability, increased productivity, and targeting high inflation.

This is a policy that has been adopted by the SNP, but is only possible if Holyrood has the full powers of a normal independent country. We at Modern Money Scotland have written a paper on this policy, which readers can find on our website.

The third policy is to prevent excessive price increases from big business and wealthy individuals. Whilst prices are increasing on basic necessities such as food, housing, and energy, big businesses have more than doubled their profit margins. The government can either place downward pressure on suppliers, place price-regulations across the board or bring vitally important sectors into public ownership.

The fourth policy is to increase taxes on the wealthiest in our society. Rather than allow the top 5% to increase their shares and assets, further locking out lower income families from certain markets, higher taxes would reduce their demand. The excessive wealth built up by the top 5% has allowed them to manipulate and directly control the “free” market to their benefit, but with progressive tax brackets that power is significantly reduced.

The fifth policy is to introduce a Foreign Investment Review Board (FIRB). Wealthy investors and buyers from outside Scotland have a large capacity to purchase domestic resources to use them as speculative vehicles, corporate sector leverage, or lobbying power to manipulate the political process. A FIRB would inspect these investments and only greenlight them if they would go on to benefit domestic communities. If an investment would deny the domestic population affordable housing, then a FIRB would prevent such an investment from occurring.

The last policy solution is to establish a committee within the central bank to monitor and analyse output gaps and price stability within the economy. This committee would produce evidence-based policy analysis as to how spending and lending in different sectors of the economy would impact inflation levels and demand. In turn, this would inform our parliament as to the real impacts of spending, rather than sticking to the austerity narrative that scaremongers about the size of our country’s government deficit.

Question 26

Should an independent Scotland use the Euro?

Accepted Answer

No. Despite the aspirations of the Euro, it has fundamentally failed both in principle and its monetary design. Rather than creating stability, Euro-members often find themselves lagging behind their neighbours who enjoy the benefits of controlling their own currency. On top of that, Euro-members have become greater victims to political instability due to the growing threat of the far-right.

Europe works at its best when we accept the diversity that exists within it. This is true on a social, political, and economic scale. Each European nation has unique strengths and problems that are best addressed by the people living in these countries. Yet, rather than accept diversity, the Euro forces the same single fixed exchange rate and interest rate to all Euro-members. Whilst the Euro’s interest rate may work for some countries, or possibly the majority, many members will be left worse off if the rate does not meet their individual needs. Europe does not offer serious flexibility for Euro members to take differing monetary policy.

Whilst developed countries with their own currencies have largely enjoyed lower unemployment rates, Euro members have seen unemployment rates between 7-12% over the last decade alone. For contrast, Scotland’s unemployment rate over the last decade has fallen from 8% to just below 4%. For Scotland to become independent, only to join a monetary system that would likely double our unemployment, is economic illiteracy.

Euro members are only allowed to maintain a 3% government deficit or less and a debt to GDP of 60% or less. The reasoning behind this target is to “balance the books”, but this is simply austerity. Former UK chancellor George Osborne, who implemented some of the worst austerity levels in all of Europe, only managed to reduce the UK deficit to 2.8% after six years. Six years of increasing food banks, child poverty, deteriorating physical and mental health, failing infrastructure, growing crime, and increasing mortality.

Why 3% and 50% ratio targets? The numbers were completely made up on the spot by two low-level employees at the French Ministry of Finance in 1981. This was done to limit the aspirations and demands of French ministers who wanted to expand spending. There is zero scientific or academic evidence behind this rule.

Article 126 of the Treaty on the Functioning of the European Union allows the European Central bank to fine Euro members for breaching their ratio targets. They can also refuse lending to Euro members if they are deemed fiscally irresponsible. But this rule does not apply to non-Euro members. Whilst Euro members are forced to accept the Growth and Stability Pact, non-Euro members go through a “Convergence Programme”.

Question 27

Would Scotland be forced to adopt the Euro if it joined the EU?

Accepted Answer

No. Any country that wishes to adopt the Euro must join the EU's European Rate Mechanism (ERM II) for two years. The Council of the EU and European Council have already stated that "participation in the ERM II is voluntary". Therefore the EU cannot force an independent Scotland, or any future member state, to join the Euro.

Sweden has been a member of the EU for 27 years, and to this day has not adopted the Euro. Instead it enjoys monetary sovereignty with the Swedish Krona.

Question 28

Would Scotland be forced to follow deficit/debt rules of the EU?

Accepted Answer

No. Euro members are forced to accept Stability Programmes if they breach the EU's 3% deficit/GDP or 60% debt/GDP ratio rules. These rules are strictly tied together in the Fiscal Compact. This can, in theory, result in Euro-members being fined directly by the European Central Bank. These rules are explained in detail under Title III in the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union.

Non-Euro members go through a Convergence Programme, and are specifically exempt from Title III in the Treaty of Stability, Coordination and Governance. Countries that are exempt include the  Poland, Sweden and Croatia. Other countries such as Czech Republic and Hungary can both opt for exemption from Title III, but have chosen to follow it out of political will.

In the case of Sweden, the Swedish government notes: "The treaty does not entail any legal obligations for the member states of the European Union which, like Sweden, do not have the euro as their currency and do not declare their intention to be bound by parts of the treaty."

The Convergence Programme encourages non-Euro members to reduce spending, but there is no economic consequence if member states carry on investing into their economy above the EU's ratio targets. Non-Euro members explicitly do not follow the last stages of the Stability Programmes. Non-Euro members cannot be fined since their currency is not directly linked to the European Central Bank.

However, even Eurozone members have never been fined. This is because on average across all EU member states the fiscal and debt rules have been broken around 50% of the time. If the EU's deficit and debt rules were strictly followed, it would result in brutal austerity that would cause both social and economic chaos. This would not be politically feasible and completely undermine the EU as a political project.

As of now, the EU's fiscal rules have been suspended until 2024 due to demands for higher government spending, particularly to face challenges of the Covid-19 pandemic and the war in Ukraine. This has also left the door open for wider reform to either scrap the rules or make them more flexible.

Question 29

Would Scotland having a government deficit above 3% stop us joining the EU?

Accepted Answer

No. This claim is most often perpetuated by politician Alex Cole-Hamilton, who intentionally or not is confusing two sets of processes when entering the EU.

When countries wish to join the EU, they need to meet the criteria set out in the chapters of the acquis. There is no specific deficit requirement within these chapters. For example, Croatia joined the EU in 2013 whilst consistently running government deficits above 3% to GDP, including the year it joined.  Cyprus joined the EU in 2004 with a deficit to GDP of 3.7%, and the year prior at 5.9%. Hungary, who also joined the EU in 2004, consistently ran a deficit above 3% to GDP between 2001 to 2011.

The 3% deficit to GDP rule that Alex Cole-Hamilton is referring to are Stability Programmes that are intended for EU member states that adopt the Euro, who specifically need to follow Title III-Fiscal Compact in the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union. However, Croatia, Poland and Sweden are all exempt from Title III because they are not Euro members and instead have their own currency. An independent Scotland with its own central bank and currency would also be allowed an exemption from Title III.

Question 30

Could an independent Scotland have free movement of people between the UK and EU?

Accepted Answer

Yes. An independent could apply to be a member of the Ireland-UK Common Travel Area. This would mean that there would be no passport controls between an independent Scotland and the rest of the UK. This would need to be agreed between both the EU and UK. Dr Kirsty Hughes, former Director of Scottish Centre on European Relations and a Fellow of the Royal Society of Edinburgh , argues that an independent Scotland would likely get an opt-out of the EU's Schengen area. This would mean people living in Scotland would have a win-win situation of free movement of people between the UK and the EU.

Question 31

Could an independent Scotland keep the pound?

Accepted Answer

Yes. Sterling is an internationally traded currency that any country can adopt. In 2014 the leader of the anti-independence campaign, former Chancellor of the Exchequer Alistair Darling, admitted that an independent Scotland can continue to use the pound if it so desired.

This would later be confirmed by the Bank of England's former governor Mark Carney,  who stated at a session of the Commons Treasury Committee : "The question was asked whether a currency union requires a political union…No from the strict economics it doesn’t."

These views were similarly expressed by other economic commentators at the Adam Smith Institute and the Institute of Economic Affairs. It is not a question of if Scotland can keep the pound, but rather would it be in its best interests to do so.

Question 32

Should an independent Scotland keep the pound?

Accepted Answer

No. For Scotland to have control of its economic policy it will need the full powers of independence. That means its own currency and central bank.

If an independent Scotland uses Sterling, with or without the cooperation of the Bank of England, policy levers over our exchange rate, money supply, inflation rate, and interest rates will be set in London. This means an independent Scotland's fiscal policy will be severely limited, and we would be unable to meet the spending priorities for the needs and wants of the Scottish population.

As we discuss in the first questions of our FAQs, countries that are monetarily sovereign are not financially restrained. A country like the UK does not rely on taxation or government bonds to spend because they serve other functions. This is known as the S(TAB) framework - spending precedes taxing and borrowing.

But by using the pound, our level of spending is limited by taxation and borrowing because we would not control our own currency or central bank. We would need to collect currency to spend. By using the pound we are limiting ourselves to the (TAB)S framework - taxing and borrowing precedes spending. Whilst countries like the UK, Japan, Australia, New Zealand, the US, Sweden, Denmark, and Norway are all currency issuers, an independent Scotland using the pound would be a currency user. To see potential dreadful effects of what being a currency user does to a country, read out response to the question "Would an independent Scotland be Greece without the sun?" and "Should an independent Scotland use the Euro?"

An independent Scotland adopting the pound may also hinder it from re-joining the European Union. Chapter 17 of the Aquis Communitaire, a set of EU rules that all member states must apply, states that "economic and monetary policy contains specific rules requiring the independence of central banks". An independent Scotland using the pound would not have monetary independence, and therefore could struggle to re-join the EU.

Question 33

Has any country "adopted" MMT?

Accepted Answer

Countries do not "adopt" Modern Monetary Theory because it is not a policy regime. MMT is a lens that simply describes how monetary systems work across the globe, no matter how different they may be to each other. The MMT lens presents a modern and accurate description of how the system operates, and thus offers a better understanding of the policy choices we have available to us. What those policy choices are will depend on the context each country is in.

Economists who used the MMT lens were able to predict the 2008 financial crash, the 2009 Eurozone crisis, and the growth collapse in Japan, whilst orthodox economic models failed to do so. To this day the same failed economic models are being applied when analysing the economic prospects of Scottish independence. Our goal at Modern Money Scotland is to set aside misinformation from orthodox models and provide a more accurate lens.

MMT is like gravity - it simply exists. So in that sense, all countries are "doing" MMT because its analysis applies to all of them.

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Frequently Asked Questions

Is Scotland subsidised by taxpayers from the rest of the UK?

Where would an independent Scotland get the money from?

Is all UK government spending really just newly created money?

If all government spending is newly created money, why bother with taxation?

Would a government deficit economically harm an independent Scotland?

Would the national debt be economically harmful for an independent Scotland?

Would an independent Scotland have to borrow from the rest of the UK?

Would increasing an independent Scotland's money supply lead to hyperinflation?

Would Scotland end up like Weimar Germany, Zimbabwe, and Venezuela?

Would Scotland leaving the UK currency union be disruptive?

Would an independent Scotland have to borrow money to support the economy?

Would an independent Scotland be "Greece without the sun"?

Would an independent Scotland's trade deficit and exchange rate lead to high inflation?

What would happen to my mortgage in an independent Scotland?

Would Scotland's trade deficit harm the Scottish economy?

Would Scotland shut itself off from the rest of the world?

Would transaction costs with trade damage the Scottish economy?

Would unemployment increase after independence?

Would private borrowing from banks harm a Scottish currency's exchange rate?

Does MMT only apply to the USA and not Scotland?

Would the UK have large influence over Scotland's monetary policy?

Would Scotland need hundreds of billions in foreign exchange reserves?

Where would Scotland get its foreign exchange reserves from?

Would an independent Scotland be dependent on foreign exchange reserves?

How could an independent Scotland tackle inflation?

Should an independent Scotland use the Euro?

Would Scotland be forced to adopt the Euro if it joined the EU?

Would Scotland be forced to follow deficit/debt rules of the EU?

Would Scotland having a government deficit above 3% stop us joining the EU?

Could an independent Scotland have free movement of people between the UK and EU?

Could an independent Scotland keep the pound?

Should an independent Scotland keep the pound?

Has any country "adopted" MMT?