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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Who will win the Copeland by-election?

Labour face a tricky task in holding onto the seat. 

What’s the Copeland by-election about? That’s the question that will decide who wins it.

The Conservatives want it to be about the nuclear industry, which is the seat’s biggest employer, and Jeremy Corbyn’s long history of opposition to nuclear power.

Labour want it to be about the difficulties of the NHS in Cumbria in general and the future of West Cumberland Hospital in particular.

Who’s winning? Neither party is confident of victory but both sides think it will be close. That Theresa May has visited is a sign of the confidence in Conservative headquarters that, win or lose, Labour will not increase its majority from the six-point lead it held over the Conservatives in May 2015. (It’s always more instructive to talk about vote share rather than raw numbers, in by-elections in particular.)

But her visit may have been counterproductive. Yes, she is the most popular politician in Britain according to all the polls, but in visiting she has added fuel to the fire of Labour’s message that the Conservatives are keeping an anxious eye on the outcome.

Labour strategists feared that “the oxygen” would come out of the campaign if May used her visit to offer a guarantee about West Cumberland Hospital. Instead, she refused to answer, merely hyping up the issue further.

The party is nervous that opposition to Corbyn is going to supress turnout among their voters, but on the Conservative side, there is considerable irritation that May’s visit has made their task harder, too.

Voters know the difference between a by-election and a general election and my hunch is that people will get they can have a free hit on the health question without risking the future of the nuclear factory. That Corbyn has U-Turned on nuclear power only helps.

I said last week that if I knew what the local paper would look like between now and then I would be able to call the outcome. Today the West Cumbria News & Star leads with Downing Street’s refusal to answer questions about West Cumberland Hospital. All the signs favour Labour. 

Stephen Bush is special correspondent at the New Statesman. His daily briefing, Morning Call, provides a quick and essential guide to British politics.