Why the SNP shouldn't be celebrating the UK's pledge to guarantee Scotland's debt

The move reflects the justified belief among investors that Scotland's debt position would be weaker than that of the UK.

The SNP is busy spinning today's pledge by the Treasury to guarantee all UK debt in the event of Scottish independence in its favour. Deputy First Minister Nicola Sturgeon tweeted: "UKG debt announcement today marks the moment that common sense & mutual self interest begins to trump #projectfear", while Alex Salmond declared that the move meant Scotland would be in "an extremely strong positon to negotiate a fair deal." 

The announcement means that rather than transferring a proportionate share of UK gilts to Scotland following independence, the British government will continue to guarantee them and expect the Scottish government to reimburse it accordingly. Here's the key passage from the Treasury paper: 

1.1 In the event of Scottish independence from the United Kingdom (UK), the continuing UK Government would in all circumstances honour the contractual terms of the debt issued by the UK Government. An independent Scottish state would become responsible for a fair and proportionate share of the UK’s current liabilities, but a share of the outstanding stock of debt instruments that have been issued by the UK would not be transferred to Scotland. For example, there would be no change in counterparty for holders of UK gilts. Instead, an independent Scotland would need to raise funds in order to reimburse the continuing UK for this share. 
 
1.2 An entirely separate contract between the continuing UK Government and an independent Scottish state’s Government would need to be established. The respective shares of debt and the terms of repayment would be subject to negotiation. 

The reason for this move, as Danny Alexander has just explained on Sky News, is the danger that the UK's borrowing costs could rise in advance of the referendum as investors demand a "risk premium" on the basis that an independent Scotland would be less creditworthy than the UK (even after the loss of the latter's AAA rating). 

Owing to Scotland's weaker fiscal position, investors would demand higher returns on debt held by its government, which is precisely why the SNP was wrong to greet the announcement as a vindication. As the IFS (which has no stake in the race) recently noted, Scotland's lower birth rate and lower immigration rate means it automatically incurs a larger "fiscal gap" (the difference between spending and revenue) of 1.9%, compared with 0.8% for the UK. Even in the most optimistic scenario, Scotland would need to raise taxes or cut spending by an additional £2bn (such as through a 8p rise in the basic rate of income tax or an increase in VAT to 27%, or a 6% reduction in public spending) to achieve a sustainable debt level. Should oil revenues prove less buoyant and borrowing less cheap than the SNP anticipates, this figure could rise to £9.4bn (the equivalent of an 18p rise in the basic rate or a VAT rate of 36%), a scale of austerity that makes George Osborne look like a Keynesian. This doesn't mean that an independent Scotland wouldn't be economically viable, but it does mean that most voters would be worse off. 

The real significance of today's announcement is that investors rightly believe that Scotland's debt position would be weaker than that of the UK - and that is nothing for the SNP to celebrate. 

Alex Salmond and Nicola Sturgeon present the White Paper for Scottish independance at the Science Museum Glasgow on November 26, 2013 in Glasgow. Photograph: Getty Images.

George Eaton is political editor of the New Statesman.

Photo: Getty
Show Hide image

Commons Confidential: Herod in the House

Your weekly dose of gossip from around Westminster.

The spell cast over Theresa May by the youthful Gavin Williamson and Cronus, his pet tarantula, leaves envious Tory rivals accusing him of plotting to succeed the Stand-In Prime Minister. The wily Chief Whip is eyed suspiciously as a baby-faced assassin waiting to pounce.

My tearoom snout whispers that May is more dependent on the fresh-faced schemer (he also served as David Cameron’s PPS) who signed a survival deal bunging the DUP £1bn protection money than she is on David Davis, Philip Hammond, Amber Rudd or Boris Johnson. She delegated the reshuffle’s middle and lower ranks to Williamson, but his nous is questioned after he appointed Pudsey’s Stuart Andrew (majority: 331) and Calder Valley’s Craig Whittaker (609) as henchmen. Vulnerable seats are dangerously unprotected when whips don’t speak in the House of Commons.

Left-wing Labour MPs mutter that Jeremy Corbyn is implementing a “King Herod strategy” to prevent the birth of rival messiahs. A former shadow cabinet member insisted that any display of ambition would be fatal. The punishment snubbings of Yvette Cooper and Chuka Umunna, who had expressed a willingness to serve, were intended to intimidate others into obedience. The assertion was reinforced by an influential apparatchik musing: “John [McDonnell] is looking for a bag carrier, so Chuka could apply for that.” The election has laced the boot tightly on the left foot.

The military career of Barnsley’s Major Dan Jarvis included service in Northern Ireland. Perhaps old acquaintances will be renewed with the allocation to Sinn Fein’s seven MPs of a meeting room next to the Labour squaddie’s office.

Ian Lavery, the burly ex-miner appointed as Labour’s new chair by Jeremy Corbyn, disclosed that he was bombarded with messages urging him to “nut” – that is, headbutt – Boris Johnson when he faced down the Foreign Secretary on TV during the election. I suspect that even Trembling BoJo’s money would be on the Ashington lad in a class war with the Old Etonian.

Campaign tales continue to be swapped. Labour’s victorious Sharon Hodgson helped a family put up a tent. The defeated Lib Dem Sarah Olney was heckled through a letter box by a senior Labour adviser’s five-year-old son: “What’s that silly woman saying? Vote Labour!” Oddest of all was the Tory minister James Wharton informing his opponent Paul Williams that he’d put in a good word for him with Labour HQ. There was no need – Williams won.

The Tory injustice minister Dominic Raab is advertising for an unpaid Westminster “volunteer”, covering only “commuting expenses”. Does he expect them to eat at food banks?

Kevin Maguire is Associate Editor (Politics) on the Daily Mirror and author of our Commons Confidential column on the high politics and low life in Westminster. An award-winning journalist, he is in frequent demand on television and radio and co-authored a book on great parliamentary scandals. He was formerly Chief Reporter on the Guardian and Labour Correspondent on the Daily Telegraph.

This article first appeared in the 29 June 2017 issue of the New Statesman, The Brexit plague

0800 7318496