A veteran British civil servant - who served as permanent secretary to the Treasury from 2005 to 2016, working with three Chancellors - has warned that a Scottish pound pegged to UK Sterling would have a tricky transition, which could lead to higher interest rates in Scotland.
Lord Nick Macpherson of Earl's Court was speaking during questions after his talk Treasury orthodoxy: Fact or Fiction?
The event, sponsored by The Strand Group in conjunction with University of Edinburgh Business School and the City of London Corporation, held at the Johnnie Walker Experience in Edinburgh, heard the former Treasury mandarin defend the historical twists and turns of the department.
Most recently, the Treasury came under fire during the short rein of Prime Minister Liz Truss and her Chancellor Kwasi Kwarteng, who emboldened their radical economic plans with an attack on “the Treasury’s failed orthodoxy”, while its supposed foot-dragging was alleged to be an obstacle to economic growth.
The first act of the previous chancellor was to sack the permanent secretary.
“But the markets bit back and the chancellor was fired, the prime minister resigned and the new regime has gone to extraordinary lengths to demonstrate its commitment to sound public finances,” Macpherson pointed out.
He said the new watchwords are ‘stability’ and ‘confidence’, adding that “Treasury Orthodoxy, it is claimed, is not just ‘in’, but back with a vengeance”.
Speaking on the economics of Scottish independence, and First Minister Nicola Sturgeon's recent plans for a Scottish pound, Macpherson said: “My view has always been that Scotland could be a very successful independent country.
“You look at other successful small countries and there are certain decisions to do with the public finances and the exchange rate, and so on, which you have to tackle head on.”
Macpherson admitted he was not close enough to the whole debate in Scotland, but from his 30 years’ experience working with a range of chancellors, he stated: “The idea of having an independent currency seems to be the logic of being independent - what would worry me a bit is the transition period, when the Scottish pound is completely linked to the pound Sterling.”
“If Scotland is still running a big deficit - because the history of countries which link their currencies to another's shows it can work for a while - you are running a bigger deficit, people begin to wonder whether that peg is sustainable.
“In the first instance what happens is the interest rates on your [national] borrowing start to go up.”
Macpherson also spoke about how the Sterling had been pegged with other currencies, which had harmed the UK economy, pointing out that allowing it to float to its natural level was the safest option, preventing a run on the national bank as it was attacked by foreign exchange currency speculators.
“It is quite possible that the transitional period [for a Scottish pound] could go on for quite a long time - I would want to understand how the Scottish Government planned to handle that.”
When asked by interviewer Bernard Ponsonby about the UK Government’s squeeze on public finances to pay down the country’s debt, the thorny question of the Barnett Formula was raised.
This was devised in by Joel Barnett [then Labour's Chief Secretary to the Treasury] in 1978, and is the mechanism which grants the Scottish Government a guaranteed set percentage of national UK budgets; no matter what the financial position of the UK.
“We already know that public expenditure in Scotland is materially higher than it is in England, so is the Barnett Formula sustainable if this gap emerges in a period of potentially ‘turbo-charged’ austerity?” asked Ponsonby.
Macpherson replied: “This was a formula that was meant to be completely temporary.
“Every government I worked for at some point said we really need to do something about the Barnett Formula, but usually within about five minutes they backed off it - it is really hard to come up with an alternative.”
He said Scotland has historically tended to do well from the formula, whereas Wales has lost out.
Ponsonby said: “The Scottish Government’s view is that we are starved of resources from Westminster and yet there are whole swathes of public policy from free personal nursing care, free tuition, free prescriptions, free bus passes, that are funded out of a formula because the Scottish Government, even in difficult times, have the financial wiggle room to deliver.”
Macpherson replied: “If a traditional UK Government department was funded on the basis of the Barnett Formula, they would love it.
“I think the Barnett Formula is a reflection of Scotland’s influence within the Union, some would argue it secures the case for staying in the Union, but I wouldn’t want to comment.”
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