The paper examines what independence would mean for Scotland’s economy and how this would impact on Scotland’s macroeconomic framework choices, including its choice of currency.
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The analysis sets out that the UK is one of the most successful monetary, fiscal and political unions in history, and the current arrangements bring significant benefits to Scotland. Taxation, spending, monetary policy and financial stability policy are co-ordinated across the whole UK to the benefit of all parts of the UK. Risks are pooled and the UK has a common insurance against uncertainty. Within a sterling currency union, an independent Scottish state would find it more difficult to adjust to the effects of economic challenges, such as a fall in the global price of oil, than Scotland is able to as part of the UK.
In turn, the continuing UK would become exposed to much greater fiscal and financial risk from a separate state, creating risks for continuing UK taxpayers. The subsequent experience of the euro area in the financial crisis highlights the challenges of creating a durable currency union. The analysis concludes that, in the event of a vote for independence, the Treasury would advise the UK government against entering into a currency union. The UK pound is one of the oldest and most successful currencies in the world. If people in Scotland vote to leave the UK they are also voting to leave the UK pound.