Debt – the first move

Dr. David Bell

Dr. David Bell

In a piece originally published by the Scottish Sun on 15 January 2014, David Bell discusses the recent UK Governemnt announcement regarding debts in response to concerns from the markets about the status of UK debt should Scotland become independent. 

The UK Government has just announced that it will honour its debts. It has done so since before Charles II lost his head, so why did it need to make this announcement? Because it claims that those who lend money to the UK are asking questions about how the debt will be shared if Scotland becomes independent. So far, the UK government has refused to say what it might do after independence. But these concerns have forced it to show its hand. The UK government depends on the money markets to keep our schools open, to pay for pensions and to keep the health service running. Just now it can borrow at very low interest rates. Upset the markets and these rates would rise. The extra costs would have to be paid from higher taxes, or from cuts in public services.

Why the concern about Scottish independence? Because the UK expects that an independent Scotland would become responsible for a share of UK debt. If it was shared equally across all of the UK population, Scotland’s interest charges on the debt would be around £4bn. This is equal to double the total amount of council tax raised in Scotland. Some argue that this is the only fair way to share the debt: the SNP argues that Scotland’s share should be reduced because of the money that North Sea oil has made for the UK.

Uncertainty about the way the debt might be divided will make investors nervous. They will be less willing to lend to the UK. This would push up interest rates. To keep investors happy the UK Government has removed the uncertainty by agreeing to repay all debt issued before the independence referendum. It expects to agree with the Scottish Government that it will pay its share of the debt charges. But, if there is a Yes vote, the Scottish Government can choose not to pay.

A threat not to pay might be part of a strategy to get a good deal when the split takes place. There will certainly be a lot to argue over: the currency, Trident, energy, borders and so on. It will take some time to reach a deal.

But there is a danger in threatening not to take on a share of the debt. One of the first actions of an independent Scotland will be to go to the markets to raise cash. It will also want to keep interest charges as low as possible. For this, it will need a good credit rating. And the markets might be wary of a borrower that would not take a share of UK debt.

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2 Responses to Debt – the first move

  1. Peter A Bell says:

    The Scottish Government has never threatened to refuse to take on a share of UK debt. This is a total myth put about by anti-independence campaigners. The Scottish Government has always said that it anticipated an equitable allocation of liabilities and assets following the dissolution of the union.

    Whatever uncertainty there is has been caused by the UK Government. By refusing to even mention those assets it gives cause for concern that it might not be amenable to the equitable settlement sought by the Scottish Government. The “jitters” supposedly suffered by the financial markets is further aggravated by the UK Government attacking the Scottish Government’s proposal to maintain the sterling zone while refusing to say whether it intends to abolish the currency union if Scotland votes Yes.

    The situation is not helped either by the UK Government’s refusal to say whether it intends to oppose Scotland’s continuing membership of the EU. Or their refusal to seek an opinion on this matter from the European Commission.

    In fact, the whole anti-independence propaganda campaign being conducted by the UK Government, the British parties and Better Together seems almost designed to generate nervousness in the money markets. From talking down the value of oil reserves to threats of border controls and low-level economic warfare, the whole thing is a massively irresponsible exercise in generating fear and uncertainty. The only surprise is that there has not been an earlier and more adverse reaction from lenders.

    Is there really any cause for concern? Dr bell is at pains to point out that, “If it was shared equally across all of the UK population, Scotland’s interest charges on the debt would be around £4bn.”. What he neglects to mention is the fact that this charge is already being met by Scotland from Scotland’s resources. It is not being paid on our behalf by a munificent British state. The full charge on debt is met from the combined resources of the entire UK. If Scotland’s share of the debt is to be calculated on a population basis then so must its contribution to the repayment.

    The question of how much debt Scotland will be left with after independence may not be amenable to a definitive answer, this being something that would be subject to negotiation. But this does not mean that it is a complete unknown. The amount is only variable within certain parameters. The minimum may, in theory, be zero. But this relies on the (hopefully) unlikely scenario of the UK/rUK Government behaving in an extraordinary manner. The maximum must be a population-based share. And the question of who would pay that, and how, is easily answered – the same people as are paying it now, from the same resources that currently enable us to pay our way.

    Scotland’s independence does not entail nearly as much uncertainty as British nationalists try to make out. What uncertainly does exist is being caused entirely by the irresponsible behaviour of UK Ministers.

  2. I’d be interested to know if you agree with Drs. Armstrong and Ebell:

    “[However the UK’s public debt is split ] …in all cases, the UK’s debt to GDP ratio will rise, with possible consequences for its credit rating. At the same time, Scotland’s debt burden will be lower than the UK’s in all cases.”


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