By Martin Kelly
The rest of the UK (rUK) faces having to increase taxes in the event of a Yes vote if post-referendum negotiations result in the UK Treasury having to service all of the UK’s current debt.
Analysis carried by the Scottish Government has concluded that any refusal on the part of the Westminster Government to share assets and liabilities equitably would leave the remainder of the UK with up to £130bn more debt than would otherwise be the case.
The paper shows that the rest of the UK would face between £4 billion and £5.5 billion a year in additional interest payments, equivalent to increasing the basic rate of income tax in the rUK by one pence.
The analysis follows threats from UK Chancellor George Osborne who recently announced that there would be no currency union between the rest of the UK and a newly independent Scotland. Mr Osborne’s stance was backed by Labour Shadow Chancellor Ed Balls and Lib Dem counterpart Danny Alexander.
The Scottish Government has insisted it is prepared to accept a share of the UK debt in return for an equitable share of UK assets, which it says includes the Bank of England which was nationalised in 1946, and the pound. The Bank of England holds almost a third of UK public sector debt.
Claims from Unionists that a newly independent Scotland would be seen as having defaulted on its debt have been challenged by some observers, including expert in Constitutional Law at the University of Edinburgh Professor Christine Bell, who has argued that the UK Government retains liability for UK public sector debt:
Earlier this month the academic wrote: “Legally under international law the position is clear: if the remainder UK keeps the name and status of the UK under international law, it keeps its liabilities for the debt. The UK took out the debt, and legally it owes the money. Scotland cannot therefore ‘default’.”
In January the UK Treasury itself accepted that they would honour the contractual terms of debt issued in the past by the UK. A statement said: “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.”
Finance Secretary John Swinney said:
“The Scottish Government has consistently proposed that following a vote for independence we reach agreement with the rest of the UK on a fair share of assets and liabilities, including the Bank of England which holds a third of UK public sector debt.
“That is the fair, reasonable and responsible approach we continue to put forward. However, people in the rest of the UK deserve to know the logical consequences of the position the Westminster government are taking.”
The paper also revealed the impact on the debt to GDP ratio if the rUK was left with all of the debt.
According to the paper, assuming that the rest of the UK retains responsibility for the entire outstanding stock of UK debt, which Scotland’s Future forecast to stand at £1.6 trillion by 2016-17, this would imply a net debt to GDP ratio for the rest of the UK in excess of 95%.
The reverse would be true of an independent Scotland. The paper forecast that Scotland would be left broadly in fiscal balance under the low North Sea revenue scenario and forecast to run a fiscal surplus of £1.1 billion under the higher North Sea revenue scenario.
The analysis also concluded that future borrowing costs for an independent Scotland will depend upon the fiscal and economic strengths of the Scottish economy. It pointed to a number of countries of comparable size to Scotland – including Denmark (1.9%), Finland (2.0%), Austria (2.2%) and Sweden (2.4%) – who pay lower rates of interest than the UK (2.8%) on such borrowing.
On the basis of this forecast, said the paper, in principle there would be only limited requirement to approach the markets and issue Scottish Government debt for cash flow purposes. Consequently future interest payments would be substantially lower.
John Swinney added: “The Treasury has claimed that the UK would be the continuing state with exclusive access to the role and responsibilities of the Bank of England. If you follow that argument to its logical conclusion then it is also responsible for the entire debt liability – which could mean the rest of the UK taking on additional debts of up to £130 billion.
“That would result in debt servicing costs of the rest of the United Kingdom increasing by between £4 billion and £5.5 billion each year – a devastating impact which would be the equivalent of increasing the basic rate of income tax by one pence.
“That would represent a significant and unnecessary cost to taxpayers in England, Wales and Northern Ireland when, as part of the proposals we have put forward, an independent Scotland would be quite happy to pay our fair share of UK debts as part of negotiated arrangements, which would include participation in a Sterling zone
“This is just one of the reasons, alongside the costs that rejecting a currency area would impose on business in the rest of the UK, that the Treasury will drop this bluff and bluster the minute the campaign is over.”
Polls carried out after Mr Osborne’s announcement suggested a backlash against the currency stance adopted by all three Unionist parties. Other surveys have suggested that the issue of currency is not high on the list of areas most people would consider significant to the independence debate.