Feb. 3 (Bloomberg) -- An independent Scotland may face more constraints on economic policy than it does now, according to the National Institute of Economic and Social Research.
Scotland would enter independence heavily indebted with no insurance from fiscal risk sharing or transfers from the rest of the U.K., Angus Armstrong, director of macroeconomic research at the London-based institute, said in a paper published today.
“Leaving the politics aside, it is unclear what independence will involve and what it can deliver in a globalised economy,” Armstrong said. “An independent Scotland is likely to find the implicit constraints on economic policy, especially fiscal policy, are even more restrictive than the explicit ones it faces as a full part of the U.K.”
Scottish First Minister Alex Salmond, whose Scottish National Party won an overall majority in last year’s parliamentary election, plans to hold a referendum on independence in the fall 2014. Salmond is also mulling including a question on whether Scotland should get increased powers while remaining within the U.K.
Salmond’s plan to keep sterling is sensible while bringing its own problems, Armstrong said. “As the example of the euro zone shows, using a currency which a parliament has no direct control over brings restrictions,” he said.
Even with a favourable settlement on oil revenue, Scotland’s fiscal balances are likely to be volatile with large deficits in some years. Debt is likely to be around 70 percent of the Scottish economy, Armstrong said.
An independent Scotland would open up the possibility of debt default in very remote circumstances as it would not have the ability to print money to repay creditors, Armstrong said.
“As some European states know this is no longer just a theoretical possibility,” he said. “As a full member of the U.K. this possibility does not currently exist for Scotland.”
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