by David Bell, ESRC Fellow, University of Stirling

Debt – Further Clarification Needed.

Did the White Paper on Scottish independence need to be so long? It arrived on my desk with a resounding thud and I wondered whether we were supposed to judge it on its physical or intellectual weight.  Yet even with the concerted efforts of the Scottish Government to produce a comprehensive prospectus, there are still issues that need further detail.

One of these is Scotland’s post-independence debt. The White Paper gives two methods by which Scotland’s national debt might be calculated. First, Scotland could take its population share of the UK debt. This is based on the argument that all UK citizens have an equal stake in the debt and that Scotland should therefore be allocated a share of debt equivalent to its share of the population. Second, Scotland’s liability could be based on its past record of fiscal deficits and surpluses. This amounts to arguing that Scotland should only be responsible for that part of the UK debt that relates to revenues and spending in Scotland. If you start the clock in 1980, when oil was about to come on stream, Scotland’s debt is much lower than with the population method. Both arguments have merit, though one might question the choice of starting date in the second option. Having opened the argument, the White Paper does not come down either on one side or the other, arguing that the “Scottish Government will service the share of the debt allocated to Scotland”. This is as close as it gets to acknowledging that the outcome will be a matter of negotiation and so cannot be definitively assigned before the independence vote. It is clear that the rest of the UK would press for the population share.

Another consideration is the precise ownership of the debt. The White Paper says that “the Scottish Government does not envisage that a proportion of UK debt would be legally transferred to Scotland on independence”. If this were to happen, then the tricky issue of Scotland issuing its own debt is avoided. Scotland would cover its share of the costs of servicing the agreed level of debt at whatever rates of UK interest rates. The markets might add some risk premium to these rates for this rather unconventional mechanism, but they are still likely to be less than the borrowing costs that a newly independent Scotland would face both because it would present as a new and unknown risk to the markets and because the market for Scottish debt would be much smaller than that of the UK as a whole, which increases the average costs of trades.

The key issue that the White Paper does not cover is why the rest of the UK should agree to this arrangement. Would it not be less problematic for the rest of the UK to force Scotland to issue its own debt? A debt-sharing mechanism might be least disruptive in the capital markets, but creditors would need some reassurance that the commitment of one country to help pay another’s debts is credible. There would clearly have to be very tight legal agreements between both governments on the allocation of servicing costs.  There is also the question of paying off debt. If the UK decides to reduce the overall value of its debt, will the agreement with the Scottish Government require it to meet its share of costs of debt reduction?

Clearly we have a very weighty document, but there is still some way to go before all of the issues are resolved. With some, it is not clear that they can be sorted out prior to independence.