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
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The big problem for the NHS? Local government cuts

Even a U-Turn on planned cuts to the service itself will still leave the NHS under heavy pressure. 

38Degrees has uncovered a series of grisly plans for the NHS over the coming years. Among the highlights: severe cuts to frontline services at the Midland Metropolitan Hospital, including but limited to the closure of its Accident and Emergency department. Elsewhere, one of three hospitals in Leicester, Leicestershire and Rutland are to be shuttered, while there will be cuts to acute services in Suffolk and North East Essex.

These cuts come despite an additional £8bn annual cash injection into the NHS, characterised as the bare minimum needed by Simon Stevens, the head of NHS England.

The cuts are outlined in draft sustainability and transformation plans (STP) that will be approved in October before kicking off a period of wider consultation.

The problem for the NHS is twofold: although its funding remains ringfenced, healthcare inflation means that in reality, the health service requires above-inflation increases to stand still. But the second, bigger problem aren’t cuts to the NHS but to the rest of government spending, particularly local government cuts.

That has seen more pressure on hospital beds as outpatients who require further non-emergency care have nowhere to go, increasing lifestyle problems as cash-strapped councils either close or increase prices at subsidised local authority gyms, build on green space to make the best out of Britain’s booming property market, and cut other corners to manage the growing backlog of devolved cuts.

All of which means even a bigger supply of cash for the NHS than the £8bn promised at the last election – even the bonanza pledged by Vote Leave in the referendum, in fact – will still find itself disappearing down the cracks left by cuts elsewhere. 

Stephen Bush is special correspondent at the New Statesman. He usually writes about politics.