Nicola Sturgeon warned new Scottish currency would cost up to £300 billion

An independent Scotland would have to find up to £300 billion to prop up its own currency, the country’s most eminent macroeconomist has warned as Nicola Sturgeon prepares to unveil her new economic blueprint for separation.

Professor Ronald MacDonald, research professor of macroeconomics and international finance at Glasgow University’s Adam Smith Business School, said tens of billions of pounds in foreign exchange reserves would have to be raised to protect the currency from economic shocks and speculators.

Ms Sturgeon confirmed she had received the SNP’s Sustainable Growth Commission report, to be published on Friday, and plans to hold a series of meetings over the summer to discuss its recommendations before taking a “formal view”

It has been reported that the 354-page document will recommend that the pound be used on an unofficial basis immediately after independence before moving to a new currency pegged to sterling.

But Prof MacDonald, who is a monetary advisor to the IMF, told the Telegraph this would mean “massive” spending cuts, tax increases or both as Scotland’s share of the Bank of England’s reserves would not nearly cover the cost.

He warned that pegging the currency to sterling was a particularly “bad idea”, as this would require a far higher level of reserves – potentially hundreds of billions of pounds - to defend it from market attack or if Scotland’s economy performed poorly relative to the remainder of the UK’s.

Although he argued the less harmful and expensive option was a free-floating currency, he said this would cause “huge issues” for Scots transferring their income, assets and savings into a different value denomination from the pound and act as a barrier to trade with England.

The professor also warned that large reserves would be required while a separate Scotland continued to unofficially use the pound to cover balance of payments deficits.

His outspoken intervention came after Keith Brown, the SNP’s Economy Minister, increased speculation the commission will recommend a new currency by stating that Scotland may no longer be using sterling in the next 10 or 15 years.

Mr Brown told a Holyrood inquiry that “I’m not a currency expert” and it was impossible to tell what changes might occur to Scotland’s currency over that period.

Mark Carney, the Bank of England governor, said it was economically possible for a formal currency union between a separate Scotland and the rest of the UK but this would require political will and shared sovereignty between the two governments.

The Yes campaign in the 2014 referendum was hugely damaged by George Osborne, the then Chancellor, ruling out this arrangement. In 2016 Ms Sturgeon charged the growth commission, chaired by former MSP Andrew Wilson, with reviewing the SNP’s currency policy.

Prof MacDonald, who has acted as a consultant to a large number of foreign governments, said his main concern with starting a new currency was the level of foreign exchange reserves required.

He said this could be between $40 billion (£30 billion) – the level held by Norway for a free-floating currency – and the $400 billion (£300 billion) held by Hong Kong, which fixes its currency’s exchange rate to the US dollar.

The academic noted that Scotland would lose the “Barnett subsidy” from the rest of the UK after independence and would be unable to borrow the reserves as it would need to establish its fiscal credibility with the markets.

“You are talking about a massive flip round from (Scotland having) a pretty large deficit to a surplus to start gathering these reserves,” Prof MacDonald said.

“It implies massive spending cuts and / or tax rises. That is the elephant in the room. Scotland’s proportion of Bank of England reserves is small beer compared to what would be needed.”

He said that even if Scotland used the pound unofficially with no central bank, in the same way Panama uses the US dollar, “everything in the economy has to be backed up by reserves.”

With 80 per cent of Scotland’s trade being with the rest of the UK, Prof MacDonald said pegging a currency to sterling would have the benefits of avoiding redenomination as “anything other than a one-to-one rate is a nightmare scenario.”

But he said fixing a currency to sterling would tie the Scottish Government’s hands as all other policy goals would be subservient to defending it. That would mean diverting public spending to protecting it from attack from speculators for whom $40 billion is “loose change”.

Prof MacDonald said the fall in the value of sterling after Brexit helped British exports but a fixed Scottish currency would have no way of lessening economic shocks in the same way, putting Scotland in a similar situation as Greece with the euro.

Speaking ahead of the report’s publication, Ms Sturgeon said it “provides an opportunity to step back, to look at Scotland’s economic future with optimism and to focus on how we seize our opportunities and achieve our full potential as a nation.”