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.

Nicola Sturgeon. Photo: Getty
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Nicola Sturgeon's half-hearted "reset" is not enough to win back voters to the SNP

Election campaigners report that the doorstep feedback suggests the First Minister is now seen as aloof, with little interest in the average voter’s concerns.

In Scots law, under a charge of robbery, theft, breach of trust, embezzlement, falsehood, fraud or wilful imposition, the accused may be convicted of "reset". It’s not clear which of these particular terms Nicola Sturgeon had in mind this week when she used that word to describe her reformed plans for a second independence referendum. Fraud seems a little too strong. Breach of trust or wilful imposition are perhaps closer to the mark.

It’s been many, many years since the SNP has seemed this unsure of its footing. Fair enough: who in politics isn’t, these days? But the slow-motion car crash that is Scotland’s governing party deserves a prime-time slot all of its own. "The SNP has squandered what was an extraordinarily strong position," says a thoughtful observer from the opposition benches.

If Sturgeon’s authority hasn’t gone – and she continues to rule Scotland’s most popular mainstream party, both at Holyrood and Westminster – it has undeniably taken a shellacking. The aura of invincibility that surrounded the First Minister’s early years in power is no more, both within and without the SNP. "What struck me as she announced her 'reset' was that a woman who was often listened to in respectful silence in the past found herself being shouted at by Labour, the Lib Dems and the Tories," says a source. "There was giggling and mockery, which is new. She seemed diminished."

My own judgement is that the reset proposal, which amounts to little more than extending the deadline for a second indyref by six months to a year, will do almost nothing to woo back the half-million voters who deserted the Nats between the 2015 and 2017 general elections. In my experience, these people don’t want the referendum delayed for six months, they want it off the table. They also want the SNP to shut up about it, and they want to see the public services and the economy given full attention. That is the challenge they have set the First Minister in the four years left of this Holyrood parliament. In an enlightening article in the Guardian this week, Severin Carrell quotes voters from the "Tartan Tory" areas that recently unseated Alex Salmond and Angus Robertson. "Fed up with the SNP, simple as."

Fed up. Sturgeon’s greatest error – a charge levelled by internal critics – was to force and win a vote at Holyrood on the holding of another referendum, after the Brexit decision but before Article 50 was triggered. In the minds of voters already worried about leaving the EU and looking for what we might call strong and stable leadership, this merely confirmed the SNP’s monomania: that it saw literally everything as a pretext for independence. The step looked cynical, it looked rushed, it looked, well, desperate.

To be fair to the First Minister, she was playing a double game. Obviously, she supports breaking up the UK and needs to continually feed the beast that is the separatist movement, but she also hoped the looming threat of another referendum would give her leverage as the UK negotiated Brexit, perhaps to secure a distinct deal of some kind for Scotland. She was wrong. "Theresa May would show up for meetings with the various leaders of the UK’s nations, read from a script and then refuse to take questions," says an SNP insider. "The whole thing has been a shambles. The British government just isn’t interested."

This deliberate mutual misunderstanding is a problem not just for the SNP, but for the smooth running of the UK. Pre-devolution, a deal such as that struck with the DUP would have been discussed in Cabinet where powerful Scottish and Welsh secretaries would demand and usually emerge with some goodies for back home. Now, each nation is run by a different tribe, the relationships are oppositional and antagonistic, and no side wants to make things easier for the other. Britain has stopped talking to itself, and stopped trading with itself. We have spiralled off into our own mini-cultures, which often bear little resemblance to each other.

Ultimately, though, Sturgeon looks like the author of her own misfortune. Her tone in Holyrood as she announced the ‘reset’ was unapologetic and belligerent. There was no real humility or admission of error, and no sense that an indyref was in any way off the table. Election campaigners report that the doorstep feedback suggests she is now seen as aloof, with little interest in the average voter’s day-to-day concerns or in listening to them. Her team seem unable or unwilling to absorb this. "They’re still pushing far too hard," says one Tory source. "The only way I can make sense of it is that they’re playing it like a poker hand. They’ve come too far and feel they have no choice but to go all-in. But it’s a losing hand."

There are only two routes I can see that might, perhaps, make something of a difference. The first is a comprehensive reshuffle that brings some of the smarter, younger MSPs into the government. Many of them, as newcomers to the cause, speak differently about independence and their reasons for joining the SNP than do the generation of Sturgeon, Salmond, John Swinney and Mike Russell.

The second is to return to the debate about devo max or federalism. Again, in conversation with the new generation of Nats you are more likely to discuss these options. A number of them are technocrats who have a view of the way Scotland should be governed. They might see independence as the best way to achieve this, but they are also open to a looser relationship within the UK, one that might involve greater powers around taxation, spending and borrowing. With every UK region outside London running a chunky deficit, Scotland could set its own deficit-reduction target and develop a plan to get there. Not only would that be good for the UK economy, it would also allow the SNP to demonstrate that a separate state could work - and indeed, would work.

In short, the SNP will not whine its way to independence. Its best option now is to do what the Scottish people are asking it to do: make a better job of running the place, and stop talking about independence for a while. First, though, that requires the party to listen.

Chris Deerin is the New Statesman's contributing editor (Scotland). 

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