Separate Scotland's 'twin deficits' would exceed £30 billion per year, eminent macroeconomist warns

A separate Scotland would start life with "twin deficits" totalling more than £30 billion per year that would require its government to dump the pound, the country's most eminent macroeconomist has warned.

Ronald MacDonald, research professor of macroeconomics and international finance at Glasgow University’s Adam Smith Business School, said Scotland has an annual £16 billion balance of payments deficit that would need to be cleared.

The latest official figures show a balance of payments deficit of 10 per cent of GDP. This means Scotland imports more goods, services and capital than it exports and a separate Scottish Government would be responsible for funding the gap.

This would be on top of the £15.1 billion public spending deficit Scotland ran up last year, according to Nicola Sturgeon's government, a figure that impartial economists have warned will spike to more than £40 billion this year thanks to the Covid pandemic.

Kate Forbes, the SNP Finance Secretary, said this week Scotland could borrow more at low interest rates to plug the gap but Prof MacDonald said this would cost more for a country with no track record of repaying debt.

"Borrowing is not a tenable long-term solution to the twin deficits problem for any country," the internationally renowned economist said.

"Under either of the proposed currency regimes for an independent Scotland borrowing is not a short-term solution either and would be massively costly to Scottish citizens."

Prof MacDonald also warned Scotland could not practically keep the pound on a temporary basis after independence, as proposed by Nicola Sturgeon, as this would trigger a currency crisis. Scotland would lack the reserves required immediately after separation to keep clearing the balance of payments.

A new currency pegged to sterling would have the same outcome, he predicted, at "great cost" to public services and tax levels.

However, he said: "A separate currency freely floating on foreign exchange markets would be credible to international capital since it would provide an adjustment mechanism for the balance of payments and facilitate borrowing at a reasonable premium over the UK benchmark."

Even this plan would require at least £30 billion of reserves to be there on day one to protect the new currency from economic shocks and speculators.

His intervention came as the author of Ms Sturgeon's growth commission claimed Scottish Government figures disclosing the huge scale of the country's notional deficit helped make the case for independence.

This week's General Expenditure and Revenue Scotland (Gers) figures for 2019/20 showed each Scot received £1,633 more than the UK average in public spending and paid £308 less tax, leading to a "Union dividend" of nearly £2,000 each.

But Andrew Wilson, a former SNP MSP, said he did not agree that Scotland benefitting from an £11 billion net fiscal transfer from the rest of the UK showed the Union was working.

"In simpler terms, relying on fiscal transfers locks in structural inequality, and ensures that poorer parts stay poorer," he said

However, he did not specify how a separate Scotland would make good the massive shortfall, other than stating it could make different spending choices, or mention the balance of payments deficit.

The article in the Times was praised by Ms Sturgeon for turning "the sterile Gers argument on its head" and by Ms Forbes.

However, Murdo Fraser, the Scottish Tories' Shadow Finance Secretary, said: "Fiscal transfers sustain public services in Scotland to the tune of nearly £2000 annually per head more than we raise in taxes. The Scottish Tories will support our NHS even if the SNP won’t."