Over the years, UK monetary policy was also a constraint on the Irish government’s budget. Although in theory it was free to decide how to tax and spend, the need to maintain the sterling peg prevented various Irish governments from deviating too far from the UK’s approach to borrowing.
An independent Scotland is likely to face similar constraints. In 2018, the Sustainable Growth Commission (SGC), an economic body set up by the Scottish government to come up with credible financial plans for independence, stipulated that a pegged Scottish currency would require significant fiscal discipline. It noted that the “6% to 7% fiscal deficit is not sustainable”. In 2022-23, Scotland’s deficit is projected to exceed 10%.
Scotland currently runs a slightly different income tax policy to the rest of the UK. It charges an extra percentage point of tax to those in its two higher income bands: 41% on earnings between £43,663 and £150,000 and 46% on earnings above £150,000. It also has slightly wider bands than the rest of the UK so that people pay these rates on more of their income.
Instead of extracting greater revenue from wealthier citizens, Ireland was compelled after independence to lower the income taxes of these people who had supported the British union to discourage them from taking their money out of the country. The government then had to raise revenues in other ways, such as via budget cuts and increased duties on alcohol and tobacco. This increased inequality by inflicting most of the pain on the (predominantly nationalist) working classes.
This was quite a shift for Ireland. In contrast to 19th century nationalist rhetoric, Ireland had received comparatively generous social spending in the final decades of the union. A significant share of the Irish economy had also benefited from free trade with Britain. Again, the same could be said of Scotland.