Debt – the first move

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.

David Bell is Professor of Economics at the University of Stirling and an ESRC Research Fellow on the Scotland and the UK project. He specialises in labour economics and the economics of the Scottish economy.