DETAILS of the Scottish Government’s 2014 plans to use the pound in an independent Scotland have been revealed.

The comprehensive 18,000-word policy papers, on establishing a Scottish Monetary Institute (SMI), were released yesterday under freedom of information laws.

The proposals also include references to the possibility of an independent Scotland having its own currency – but they go into little detail and make clear that sharing the pound with the rest of the UK was the preferred option.

Although much of what is in the 2014 documents is based on the UK and Scotland remaining in the EU, the Scottish Government will have to draw up similar plans ahead of any second vote on independence.

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Full documents:

Scottish Monetary Institute - estimated costs.xlsx

Scottish Monetary Institute - transition plan.docx

Options for a Scottish Monetary Institute - background paper.docx

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The draft papers, which were written by civil servants and not approved by ministers, set out the structures necessary for an independent Scotland’s monetary policy, and the transition from being part of the UK to going it alone. At the centre of the transition plan was the role of the Scottish Monetary Institute (SMI), which was to be established immediately after independence, and would “help coordinate and articulate technical input of behalf of Scotland into the negotiation process.”

If the outcome of negotiations led to the creation of a “Scottish Central Bank”, the paper says, the SMI could fulfil this role as either a non-departmental body or company, with shares held by the Scottish Treasury.

The upper estimate for the cost of establishing and running the SMI over the initial period was £60 million.

The SMI would be the key Scottish institution to lead “analysis of the Scottish economy, developing the necessary statistics to monitor macroeconomic conditions, whilst building strong links with the shared central bank and reporting to relevant international institutions.”

It was expected to “build capability in macroeconomic management” and over time take over more and more “additional central banking functions as it builds its expertise and institutional capacity.” Central to its role and the transition from being part of the UK to going solo, would be establishing “a formal monetary union, a banking union, and clear frameworks in place to manage fiscal sustainability.”

Based on recommendations by the Scottish Government’s Fiscal Commission Working Group, the paper suggests how the formal monetary union, where Scotland and the rest of the UK share sterling, would work.

“The Bank of England would set one interest rate and it would be responsible for Central Banking functions across the Sterling Area,” the paper says.

That institutional framework, the government economists say, was needed to take into account the “wider commercial banking system which forms an important part of the financial system and the monetary transmission mechanism.”

The paper also sets out a series of options for what the SMI could end up responsible for, ranging from the collection and analysis of statistics and economic research, all the way through to the managing of money market operations for an independent Scottish currency. Potential functions would also include “setting of monetary policy (eg interest rates) to achieve price stability” and “management of the issue of banknotes.”

The paper also says: “The design of unconventional policies, such as quantitative easing, if they were to be used again in the future, would also need to be considered as part of a framework for a formal monetary union.”

A Scottish Government spokesman said these proposals were of their time: “As part of preparations for the referendum on independence for Scotland held on 18 September 2014, Scottish Government officials carried out extensive preparatory work for the transition to independence in the event of a vote for independence.

“As this work demonstrates, the Scottish Government was engaged in thorough, detailed and comprehensive preparations for an independent Scotland ahead of the 2014 referendum, and similar work will be taken forward ahead of the planned future referendum. While these plans reflect conditions in 2014, they do not necessarily reflect the Scottish Government’s current thinking.”

An SNP source said: “The contrast is pretty stark between the work and planning we put in behind the scenes ahead of the 2014 referendum versus the evident chaos and complete lack of any plan from the Tory Government before, during or after the Brexit vote.”

But Scottish Labour’s spokesman was dismissive: “The fact that the Nationalists didn’t publish this information at the time just shows how little credibility even they thought their currency plans had.

“The SNP wants to impose another divisive independence referendum on the people of Scotland yet it still hasn’t worked out what currency we would use.”

Shadow Tory finance minister Murdo Fraser said: “It’s no wonder that the SNP haven’t brought these figures to light before now, as they detail the huge cost an independent Scotland would face in setting up its own monetary institute. The consultancy costs alone would be in the tens of millions of pounds, with hundreds of staff needed even if the Bank of England maintained responsibility for a ‘large’ number of functions.

“With an independent Scotland also facing a deficit from day one of £15 billion, it begs more questions about just how an independent Scotland would be able to balance the books. This is a hammer blow to the SNP’s separation plans”.

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These plans should be rebuilt in light of Brexit – our own currency is now a better option

COMMENT

by Dr Craig Dalzell

ONE of the weaknesses of the 2014 independence campaign has long been held to be the Scottish Government’s handling of the currency question and the perceived lack of planning for how to manage monetary arrangements. This week, however, has seen the release of government documents from before the referendum regarding the proposals for the setting up of a Scottish Monetary Institute which would have been tasked with just this kind of management.

The focus of the documents lies mainly on the Scottish Government’s then first choice of currency arrangement which was to be a member of a sterling currency union alongside the rest of the UK, with the principal Central Bank being the Bank of England. This would limit the SMI’s role to one of a statistical collection agency and providing oversight to the Scottish members of the BoE’s monetary policy committee.

But now the circumstances have changed and the SMI documents should be considered in a new light.

Brexit has fundamentally altered the argument surrounding currency and independence. In July 2016, just after the EU referendum, Common Weal produced a paper detailing our currency options and we pointed out that it might be very difficult for a Scotland within the EU to be a member of a currency union with a country which lay outside the EU and which had majority control over monetary regulations.

As the SMI documents suggest, compliance with certain EU regulations may be incompatible with sharing a monetary union with a non-EU state, especially one that is unlikely to be willing to limit itself to EU regulations in these matters. For this reason, among others, Common Weal has argued that an independent currency would offer a far clearer and more advantageous option going into the next independence campaign.

It is heartening therefore that the path towards this is laid open for this in the SMI documents. The proposals contain scope for a more ambitious role which may include expanding into a monetary board or even a fully fledged Central Bank.

It is also encouraging that the estimates for costs and timescales for setting up the Central Bank accord very closely with Common Weal’s own independent research which found that such a scheme would take around three years and would require £50 million in investment (although once operating, the Bank would be self-funding). Details on the creation and management of the bank’s reserves are also in line with research that Common Weal shall be publishing in the near future.

It is clear that the Scottish Government has been taking the question of currency and macroeconomic policy seriously, but it is important to reflect that this proposal may no longer be valid considering the materially changed circumstances in which Scotland now finds itself. The proposals should now be reconsidered and rebuilt with those circumstances in mind.

The approach taken here – that the SMI can be adapted to suit various options – is a sound and reasonable one and any updated document should apply the same level of detail of planning to all of those options. Scotland’s choice of currency and how it is managed would, after all, be a decision for the people of Scotland and the government of the day.

One point I would particularly like to see added to the updated proposals would be greater inclusion of public consultation on issues such as the design of the physical units of currency should Scotland choose to issue them. Whilst this point may have little bearing on macroeconomic policy per se, the design of a new currency as an act of civic participation could be very powerful in the early days of an independent nation. It would be an expression of how Scotland sees itself and would lend a great sense of confidence and ownership in how we govern ourselves as a nation.

I welcome the release of this body of work and hope that, with another referendum anticipated, the Scottish Government publish the detail of their proposals openly so that we can have the fullest debate possible on this vital issue. Common Weal, through our White Paper Project, will certainly be seeking to develop further our proposals for an independent Scottish currency in the coming months.

Dr Craig Dalzell is head of research at Common Weal