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Friday, August 15, 2014

The economic illiteracy of the SNP's proposals for independence

The Guardian reports on the view by one of of the world's top economists that an independent Scotland's economy would crash within seven years if it tried to use sterling.

They quote Professor Ronald MacDonald, a currency expert who advises the International Monetary Fund and the European Central Bank, who believes that the Scottish government's plans to use sterling after a yes vote are fundamentally flawed, even if Alex Salmond's proposals for a currency union were accepted by the UK. He believes that in these circumstances, the Scottish economy would shrink by up to £100bn by 2023:

MacDonald, the Adam Smith professor of political economy at the University of Glasgow and a globally recognised expert in oil-based economies, said any move to use sterling would expose Scotland to huge economic shocks because of its heavy reliance on North Sea oil revenues, but inability to set its own interest rates or control money supply.

In a damning critique of Salmond's proposals, MacDonald said that independence would immediately mean that Scotland became a petro-economy. That would leave it heavily exposed to higher prices in shops, wage rises, a significant trade deficit and increasingly expensive exports.

Using IMF methodology, MacDonald said Scotland would face an annual deficit of 7% and would cut Scotland's economic output by at least £30bn in a best case scenario, or up to £100bn in a more likely worst case scenario by about 2023. "Clearly this is very, very bad news," he added.

It would greatly increase pressure for public spending cuts and tax rises, with a future Scottish government forced to impose a punishing austerity regime to balance the books, or face the prospects of an IMF bail-out, similar to the ECB's rescue of the Irish and Greek economies.

As we get closer to the referendum the SNP's case for a yes vote continues to unravel.

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