The National:

THERE are always problems when politicians talk about economics.

The first problem is that very few of them understand anything about it. The bigger problem is that very few economists do either.

The debate on Scottish economics that has seen Nicola Sturgeon take punches from the likes of the London-based Institute for Fiscal Studies is good example of that.

The First Minister has, unsurprisingly, said that she thinks that Scotland will be viable as an independent country. I am as certain of that as she is. But, in the process she has admitted that the figures in the Growth Commission report, to which her leadership has given much emphasis in recent years, are now seriously out of date, although there is nothing to replace them, or the policies on which they are based, from the SNP or the Scottish Government.

READ MORE: Nicola Sturgeon: 'Deficit' is a good argument for Scottish independence

In the other corner is the London-based Institute for Fiscal Studies, which almost all the media, and most especially the BBC, give almost hallowed status when it comes to tax and economic commentary.

What we then have to recognise is that both protagonists suffer an enormous handicap. Both think that the Scottish economy behaves as if it is like that of a household. So, they presume nothing that the Scottish Government can do alters its income, and they also presume that the Scottish Government is entirely dependent upon taxes it can raise and borrowing it can secure to make settlement of any bills that it owes. These assumptions are wrong.

Firstly, how much a government spends, and on what, has a dramatic impact on the level of income a country enjoys. Broadly speaking, the more a government spends, the higher the level of income in a country, and the more tax that is paid in that country. The relationship holds true pretty much all over the world. This underpins Nicola Sturgeon’s claims that running deficits would be a good thing. She’s right.

This situation is most especially true in economic downturns, as we have all seen in the last year or two. When there are economic downturns the more a government spends the better off the country is. You would never think that from the commentary provided from the BBC, the Institute for Fiscal Studies, and others, but that is because they do not understand this, and not because it is not true.

READ MORE: IFS: Scotland is a 'rich country' which could become independent

Second, and as important, their assumption that the funding of government is like that of a household is just wrong. It is true that households can only raise cash from income or borrowing, and if they cannot make the books balance then they have to cut their spending, which in economic terms is called austerity. This is the logic of what is called microeconomics.

But the clue is in the name. Micro means small. This is about the economics of small organisations. However no government, including that of an independent Scotland, is small within its country. So what we need to talk about is macroeconomics: that is the economics of big organisations. And this is what most economists do not understand. The Institute for Fiscal Studies is in this category: it has said that it does not do macroeconomics. And it shows.

However, come to that, nor did the Scottish Growth Commission do much macroeconomics either. It presumed that the Scottish Government would eventually have to balance its books. Worse, it assumed that like a household it would use someone else’s money to make payment. They recommended the continued use of Sterling. Change that one assumption and give Scotland its own currency and then any Scottish government facing a crisis has another weapon at its disposal. And that is what is technically called quantitative easing, but which is much more easily thought of as government money creation.

Rishi Sunak (below) is doing £400 billion of this right now. Around the world trillions of it are being done, whichever currency you choose to measure it in. And what the economists and politicians commenting don’t understand that this is not by choice: it simply has to be done in a modern economy.

That’s because in a modern economy all money is created by banks, whether the commercial banks that we use or the central banks that government uses, like the Bank of England right now and the Central Bank of Scotland that I hope will exist on the day Scotland is independent.

The National:

The simple fact is that we need money to make our economies go round. And when commercial banks don’t create enough of that money by lending it to people then a central government bank must do so instead by lending it to its government for it to spend, running up deficits in the process, but keeping the economy going as a result. That’s what quantitative easing does. And governments worldwide have done it to prevent their economy’s collapsing, and so could and should Scotland’s. There is nothing reckless, dangerous or even unusual about this. The UK has done it without there ever being the slightest hint of a problem arising.

But to use this argument Nicola Sturgeon has to do something that she has refused to do to date. She has to abandon her commitment to using Sterling after independence. Unless she does that, she’s planning on using other people’s money to fund a Scottish deficit. London’s money, to be precise. And that would make Scotland a microeconomic economy – and as out of control in a crisis as a household without work and with a mortgage is. This is the basis of the microeconomic criticism from the Institute for Fiscal Studies and BBC, and their sense that Nicola Sturgeon’s claims do not stack is, to this extent, true. She cannot make the claims she does on deficits and stick to Sterling, and they know it.

So why hasn’t she abandoned this dedication to Sterling and dependence on London? I wish I knew why. But right now this is her Achille’s heel, and the independence movement could pay a very high price unless she changes her tack, and soon.