As agitation for Indyref2 grows, one of our favourite economists puts forward his view of what Scotland’s next move will be.

Let me begin by making clear why I dismiss the prospect of Scotland leaving the UK in the foreseeable future. My reasoning in making this admittedly very controversial claim combines risk aversion with gamesmanship. The question most frequently aimed at the SNP is not so much the vagueness of which currency they see an independent Scotland employing, for they now make it clear it will be sterling. The question it now faces is how Scotland intends to survive using a currency that is no longer managed with consideration for economic and monetary conditions within it. In very much deflecting this question, the SNP seem to be relying on a version of the Prisoner’s Dilemma.

The SNP hopes that those who challenge the idea that Scotland can have its sterling cake and eat it post-independence will realise that the rest of the UK cannot afford for Scotland to be outside of a formal currency union. After all, if such an important part of the former UK continues to use the pound unilaterally, but has no sway in its monetary policy, the result cannot fail to be an undermining in confidence in sterling. The latter would unleash adverse economic consequences across the whole of the former UK. Yields on both ‘kilts’, Scotland issued debt of the future, and ‘gilts’ would move sharply higher, unleashing severe economic unpleasantness. This threat is one I believe the SNP will rely upon when telling the Scottish electorate to dismiss the economic risks of an independent Scotland not having a voice in how sterling is managed. The problem, however, with the SNP utilising this argument is that the game the unionists will play and win is a Nash two-stage one. 

One can then be certain that if Scotland were to become an independent state, the rest of the former union would have to allow it to be a formal part of the sterling currency union, giving it representation in a new ‘Central Bank of Britain’. This, however, is merely a hypothetical sub-game win for the SNP. The problem it faces is that ahead of a vote on its independence, the unionists will play with a fixed poker face. As long as the forces which want to keep Scotland in the Union do not blink in continuing to claim that an independent Scotland would have no say in how sterling is managed, risk aversion will ensure Scots continue in the Union, however much they might think the other side is bluffing. The SNP will never get to their sub-game win because the unionists will see to it that independence is never voted for.

The doomsday scenario of the Union suffering a disorderly dissolution, where Scotland elects to discontinue from it and insists on continuing with sterling, but is locked out of its monetary management, can be dismissed entirely for all sorts of logical and indeed practical self-interest reasons. This then leaves the following outcomes: Scotland departing the constitutional Union, but remaining in a currency union with the rest of the current UK; or Scotland continuing constitutionally united but fiscally untied, with unprecedented devolved fiscal powers less pulled in by Holyrood as pushed out by Westminster. Of these two options, I am convinced the latter is the only plausible one. Remaining constitutionally united in a single market for goods, services and labour, and in a currency union, the UK will see the issuance of state debt – notably ‘kilts’, possibly ‘celts’ – trading alongside gilts, overseen by a Bank of England rebranded into the ‘Central Bank of Britain’.

Ever larger parts of taxation and spending will soon be decided beyond Westminster in a way never really known before. I am convinced that starting now to forestall calls for Indyref2, ever more powers and even more pressure to actually exercise them will be legislated from the House of Commons to Holyrood. Just as Scotland and Wales gain greater degrees of devolution, we will see the first real signs of regional fiscal policy within England, which has seen ever more super city mayors elected, of both political colours. England is set to see the creation of unitary assemblies akin to those in Edinburgh, Cardiff, London and Belfast. Within the continued constitutional Union, I envisage the separation of economic powers to elected institutions with avowedly different approaches to fiscal management. Rather than believing the Conservative party will only reluctantly devolve power, I am convinced it will willingly do so, because it will correctly anticipate that letting go of its fiscal monopoly will strengthen its central electoral hold.

We should all welcome a new untied, but United, Kingdom. A UK where, rather than us all lurching with each change of government in Westminster from one economic model to another, we experience entirely different fiscal managements being performed in real time across the nation. There will, of course, remain an overarching central bank to provide macro-prudential oversight, contrasting fiscal policies being pursued by Welsh Labour, the SNP, as well as Tory, Labour and coalition unitary assemblies across England. As to how the success, or otherwise, of intra-national fiscal policies will be measured, this is simple enough to imagine: households and businesses will vote with their feet away from fiscally poorly run regions for good. 

There will be those inclined towards the view that these arguments have been written with a disinclined view towards the SNP, and indeed Welsh Labour. I readily accept that the judgements made are prejudiced. After all, the whole point is to judge the very different economic ways each part of the UK would head under alternative forms of untying. However, the prejudices are from my objective economic judgement, not conscious or even unconscious subjective political dogma. All I say to those challenging my respective outlooks is that only time will truly tell how right, or otherwise, I am.