Think Tank says pound ‘not asset’ but no debt leaves Scotland in surplus

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  By Martin Kelly

An academic think tank has today claimed that the pound is not an asset that can be ‘shared’ following a Yes vote, but has said that a newly independent Scotland free from UK debt will benefit to the tune of billions of pounds. 

In its latest report on the financial status of an independent Scotland, the Centre for Public Policy for Regions (CPPR) has claimed that the Scottish Government’s argument that sterling is an asset jointly owned by Scotland, is “flawed” and that the value of the currency is purely symbolic.

Commenting on the Scottish Government’s position, that a share of the UK debt should go hand in hand with assets which include sharing the pound, the CPPR report says:

“However, the argument is flawed in the sense that sterling, as a means of payment, is not an asset which has a value that can be off-set against Scottish debt obligations.”

According to the latest report – on the fiscal implications for an independent Scotland when assuming that it takes on a low, or zero, share of the UK’s existing debt – its authors, Professor John McLaren and Professor Jo Armstrong, say the pound is “more a symbol than an asset” which goes back to 1694, “with the establishment of the Bank of England.”

The two academics argue that the real value of sterling is a actually a reflection of the “reputation of the government and central bank” that lies behind it.

However the report also points out that the a Scotland free from the massive UK debt burden, which is the Scottish Government’s position should London refuse a currency agreement, would benefit the nation by more than twice the revenue of north sea oil in the first year of independence and Scotland would find itself in surplus very quickly, allowing the setting up of an oil fund.  According to the CPPR, Scotland would save £5.5bn in 2016/17 from not having to service any of the UK’s debt, compared with OBR forecasts puts north sea revenue at £2.7bn for the same period.

On suggestions put forward by the Scottish Government that Scotland’s fiscal surplus from 1980 means it is responsible for less of the total UK debt, the academics question why 1980 should be used as a starting point.

The report adds: “Whilst calculating Scotland’s debt obligations on this basis in future negotiations may be justified, one challengeable line would be, why begin in 1980; the year when North Sea tax revenues started to accrue to the UK and substantially boosted Scotland’s fiscal balance? !

“Scotland’s onshore (non-oil) fiscal balance is known to have been worse, in relative terms, than that of the UK back to 1980 and it would seem reasonable to argue that this would have been the case for some time earlier than that date too. But how far should, and could, we go in making this calculation? It would be logical to calculate the net fiscal balance position, relative to the UK, back to 1707, but data that far back does not exist.”

The report authors acknowledge that there are international precedents that have seen newly independent states start out debt free, citing the break up of the former Soviet Union which saw many new states absolved from all debt.

However, in what is sure to be a controversial conclusion, the authors say the Scottish Government’s suggestion that the nation might not accept the UK’s debt liabilities, would harm an independent Scotland’s credit rating

The CPR report says: “This is an important point, as unilaterally walking away from part of the UK’s debt is likely to lead to concerns over future behaviour from the markets, ratings agencies and the EU.”, that report adds that such a move could, “trigger the application of a punitive rate of interest” which could harm businesses

However, this view has been challenged by others who say ratings agencies only acknowledge debt that is technically the responsibility of a nation who is the named creditor.  Earlier this year, the UK Treasury acknowledged that it alone was responsible for the UK debt.

Following a recent update by Standard & Poor’s, financial experts concluded: “In general, Standard & Poor’s sovereign ratings apply only to debt that the present government acknowledges as its own. Standard & Poor’s takes no position on the propriety of government debt defaults, repudiations, and the like.”

In what appears to contradict the CPPR opinion, they warned that if a newly independent Scotland took on part of the UK’s debt then it could have an adverse effect on Scotland’s credit rating: “Entities that take on debts that they are not obliged to contractually also damage their credit ratings – this is called moral hazard.”

On the issue of a currency union, the CPPR report says: “In a recent, unattributed quote, a UK coalition Minister stated that ‘There would be a highly complex set of negotiations after a Yes vote, with many moving pieces. The UK wants to keep Trident nuclear weapons at Faslane and the Scottish Government wants a currency union: you can see the outlines of a deal.’ This highlights the potential for a wide variety of negotiated settlements, covering debt, currency and other issues.”

The report’s authors claim that suggestions an independent Scotland takes on either no debt or a reduced amount of debt because of the historic surplus would lead to “acrimonious” negotiations.  Armstrong and McLaren argue that what they term “a wider set of negotiations” would more likely produce a “mutually agreed, non-acrimonious, settlement.”

However the authors acknowledge that a zero debt Scotland would be in fiscal surplus by 2018/19 and in better shape than the rest of the UK.  Even taking on reduced debt would see similar improvement, albeit by less, “Clearly if Scotland assumed some of the debt, but less than its population share, then the position would improve by less, depending on the final agreed share.” the report says.

It adds: “It might also be argued that such a zero debt and debt servicing position would then accelerate the potential for Scotland to establish an Oil/Savings Fund for financial stability purposes and to share with future generations.”

The report’s authors warn that this positive scenario also holds wnat it calls “uncertainties” with regards to the credit rating of a newly independent Scotland.

It says: “Principal amongst these is what credit rating would be attached to the issuance of any future Scottish debt. Such a rating will also be essential to the wider Scottish economy. Even with no historic debt obligations (and before any of the White Paper spending and cost saving measures are factored into the analysis), the Scottish Government would still need to borrow, if only to smooth within year revenue and expenditure mismatches.”

However, again the authors appear to go against a recent statement from international credit agency Standard & Poor’s which said that even without north sea revenue, a newly independent Scotland would qualify for its highest credit rating.

The report also acknowledges the problems a debt free Scotland could have on the remainder of the UK, pointing out that it would “have to meet its full debt obligations with a lower level of GDP,”

“This would result in its debt to GDP ratio rising, something the UK coalition Government has been seeking to reverse with their fiscal austerity measures. !

“Such an obligation would add 8-9% to the UK’s debt servicing costs.”

Last week, credit ratings agency Fitch warned that such a situation could result in the UK’s credit rating being hit and a return to triple A status delayed.

The CPPR report says of a currency union: “The Scottish Government’s best scenario position would appear to be to negotiate a shared currency union with the UK along with a low, or zero, share of debt.  Whether it can achieve such a favourable scenario remains an unknown until after the referendum.”

It concludes: “The issue of Scotland’s inherited debt at the point of independence is an important one, both in terms of Scotland’s future fiscal position and of its need to borrow. This is especially so given the poor prospects for Scotland’s fiscal balance, when based on the latest OBR forecasts (see CPPR’s most recent paper for more detail on this). !

“If a low, or zero, share of UK debt can be achieved, whether through negotiation or otherwise, it could substantially improve Scotland’s fiscal balance and so strengthen its longer term fiscal prospects. !

“As the Fiscal Commission deliberates on the other currency choices, then historic debt variants should be factored into their  analysis.”

Commenting on a new report from the CPPR, Finance Secretary John Swinney said:

“This report shows exactly how strong a hand Scotland will have in negotiations following a vote for independence, and also shows exactly why it will be in the overwhelming economic interests of the rest of the UK to negotiate fairly and openly.

“The UK Treasury has already made clear that, in the event of independence, it will remain legally liable for the entirety of UK national debt.

“However, the Scottish Government takes the fair, reasonable and responsible view that an independent Scotland should pay for a fair share of debt – but any agreement which includes liabilities must also include a fair share of the assets of the current UK and the pound.

“As we make clear in ‘Scotland’s Future’, the share of debt could be apportioned by reference to Scotland’s historic contribution to the UK’s public finances, or by population share. We could also choose to offset Scotland’s share of the value of UK assets against our inherited debt – but, whichever way you look at the figures, an independent Scotland would start life with a healthier balancer sheet than the rest of the UK and with strong public finances.

“In terms of Scotland’s overall economic standing and potential future credit rating, the recent report from Standard & Poor’s makes clear that – even without North Sea oil and gas – an independent Scotland would qualify for its ‘highest economic assessment’.”

A spokesman for anti-independence Better Together campaign said: “Only Alex Salmond is suggesting that Scotland would default on our share of the debt if we leave the UK.

“People know what happens if you don’t pay your debts – you end up with a bad credit rating and everything is more expensive.

“That would mean far higher mortgage repayments, higher credit card bills and higher costs for families.”