Bill Jamieson: Shedding debt is financial suicide

AFTER a blistering week for First Minister Alex Salmond, let’s see if we have this right.
Swinney claims the rest of the UK would lose out if Scotland was denied a currency union. Picture: Michael GillenSwinney claims the rest of the UK would lose out if Scotland was denied a currency union. Picture: Michael Gillen
Swinney claims the rest of the UK would lose out if Scotland was denied a currency union. Picture: Michael Gillen

An independent Scotland would keep the pound because it’s our currency and it would be in the interests of the rest of the UK to agree to currency sharing. But if the rest of the UK won’t agree, an independent Scotland would punish it by repudiating its pro rata share of UK debt.

For the avoidance of doubt, Scotland’s Finance Secretary John Swinney told BBC Radio Scotland last week that failure to agree a currency union would “absolve the Scots of a £120 billion share of UK debt, which translates into an annual cost of £5bn a year”.

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There are other things into which this would “translate”, as Angus Armstrong of the National Institute for Economic and Social Research pointed out last week. If it is this easy to walk away from debt obligations, secessionist movements in Europe would jump at the precedent. How might Scotland’s EU application stand then?

Yes, it would remove a hefty burden from our shoulders. But an independent country that began life with debt repudiation would find it could not raise money in international markets without lenders demanding substantially higher interest rates. Scotland’s credit rating would be rock bottom.

For this to be advocated by the country’s First Minister almost defies belief. It would be an act of national financial suicide, branding Scotland as an untrustworthy borrower and wreaking havoc with our claims to fiscal probity. It is hard to think of a threat that would backfire more spectacularly on future Scottish governments.

But this is where we are. So I will set out as dispassionately as possible what these debt obligations might be and the implications of starting life with debt repudiation.

Back in late May, both Scottish and UK governments issued final documents on Scotland’s fiscal position on independence. To help untangle the various claims, the independent Fiscal Affairs Scotland, set up in June under the chairmanship of Robert Black, former Auditor General for Scotland, looked at two key time frames: the fiscal position at the point of independence, assumed to be 2016-17, and 15 to 20 years hence.

Its research, published last week, found that on Scotland’s onshore primary balance there was little disagreement between independent and Scottish Government forecasts for 2016-17: a deficit of around £6bn.

But there is wide variation when North Sea tax revenues and debt interest payments are added. The paper sets out two possible ranges for these components: a narrow range for North Sea tax revenues of between £2.8bn and £4.7bn, and for debt related expenditure of between £3.9bn and £5.5bn. The wider range of estimates has North Sea tax revenues of between £1.2bn and £7.8bn and debt-related expenditure of between £0.0bn and £6.1bn.

Applying these estimates to the £6bn onshore primary deficit results in Scotland being in the red across the full “best” to “worst” positions of the narrow range, from between £5.1 to £8.6bn. The wider range of estimates stretches from a small surplus of £1.9bn being generated at best, and an even higher deficit of £10.8bn when applying the least beneficial outcomes. The Scottish Government estimates assume the onshore Scottish economy will grow faster than it would otherwise, and that this would increase government revenues by the equivalent of £1,000 per person.

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The stakes could hardly be higher. It is by no means clear that an independent Scottish government would be able to meet all its long-term fiscal commitments without recourse to higher taxation. The Institute for Fiscal Studies has pointed out that if an independent Scottish Government simply sought to avoid the spending cuts pencilled in for the UK as a whole for 2016-17 and 2017-18, it would need to find £2.5bn to prevent a ballooning of the deficit relative to the UK.

Back in April, Fiscal Affairs Scotland economist John McLaren, then with the Centre for Public Policy in the Regions, reckoned that Scotland’s share of current debt servicing costs would be twice the size of projected future oil revenues. The £5.5bn improvement seen in Scotland’s 2016-17 fiscal balance through not having to service existing debt would dwarf the £2.7bn estimated contribution from North Sea tax revenues in that year.

John Swinney leapt on this to say that it showed how strong a hand Scotland would have in negotiations following a vote for independence, and “also shows exactly why it will be in the overwhelming economic interests of the rest of the UK to negotiate fairly and openly”.

This sanguine view is not shared by the NIESR’s Armstrong. He reiterated last week on debt defaulting what he told Holyrood’s economy committee in March: “The precedent that that would set for the rest of Europe would be extraordinary – any part could unilaterally have a referendum on independence and have no debt. There are a lot of places in Europe that would like to do that. People have to think about the broader consequence of that”.

And on borrowing costs: “If I, as an international investor, am going to lend you money for ten years, I want to know that there is a good chance of being repaid. This is not a great precedent.”

So there you have it: the NIESR, the IFS, the OBR, Fiscal Affairs Scotland and others: the warning signs are posted. Or there is Alex Salmond, whose response can be summed up in a few bold and stirring words: they’re all wrong.