One thing is certain about an independent Scotland: it would begin life with a massive national debt. Exactly how much is problematic because the Scottish referendum on
independence will probably not be held until 2015. The Scots Numpty Party (SNP) has not proposed that the terms on which independence is to be granted are reached before the referendum. Consequently, if there is a YES vote, it will probably be another couple of years before agreement is reached,if it can be reached at all, between Scotland and Westminster on the terms of independence. In addition, some revenue streams, such as those from the oil and gas in English waters have never been formally agreed and calculated and public sector debts are not always clear-cut, for example, the cost of building a high-speed rail link to Scotland. All this means that that the best that can be done for the official UK National debt at the time of likely independence are official projections with unofficial estimates used for items such as oil and gas in English waters .
The official UK national debt as it stands now is:
“Public sector net debt (excluding financial interventions) was £910.1 billion (equivalent to 60.1 per cent of GDP) at the end of April 2011. This compares to £765.5 billion (53.0 per cent of GDP) as at the end of April 2010.
“The unadjusted measure of public sector net debt expressed as a percentage of gross domestic product (GDP), was 148.9 per cent at the end of April 2011 compared with 150.9 per cent at end of April 2010. Net debt was £2252.9 billion at the end of April compared with £2180.0 billion a year earlier.” (http://www.statistics.gov.uk/cci/nugget.asp?id=206)
The unadjusted measure includes the financial subventions such as those to RBS and Lloyds. Those wishing for a fuller description of the treatment of public sector debt should
go to http://www.bankofengland.co.uk/mfsd/iadb/notesIADB/debt.htm
The simplest and fairest way of apportioning the UK national debt is by allocating a share to Scotland proportionate to their share of the UK population. The estimated population of Scotland was 5,222,100 in mid-2010 http://www.scotland.gov.uk/News/Releases/2011/04/27095112).
The estimated population of the UK in mid 2009 was 61,792,000 http://www.statistics.gov.uk/cci/nugget.asp?id=6 . Hence, Scotland has approximately 8% of the UK population. Eight per cent of £910 billion is £73 billion; eight per cent of £2253 billion is £180 billion.
By 2015/16 the net debt figure will have increased substantially. Here is Bill Jamieson of the Scotsman spelling out what the net debt share would mean for Scotland :
“What of deficit and debt apportionment? Both in the immediate term and in the final settlement, the SNP has called for more borrowing powers. But how much more borrowing will be sought on top of Scotland’s share of UK debt? To give a proximate idea of what we face, let’s assume Scotland’s debt share is similar to that of her share of UK GDP – circa 10 per cent. By 2015-16, when a referendum vote may be held, UK net debt is projected at £1,359 billion (69 per cent of GDP) and the annual interest charge would have risen to £67bn. Scotland’s share would be £136bn, and £6.8bn respectively.” (http://thescotsman.scotsman.com/holyroodelections/Bill-Jamieson-The-burning-independence.6766635.jp?articlepage=2).
Of course, Scotland might have another year or two before independence, which even on the Coalition’s planned spending deficit reduction plans would add a few billions more – the projected spending deficit in 2015/16 is one per cent which would mean £15 billion plus added to the national debt each year past 2015/16
(http://www.soas.ac.uk/cdpr/publications/dv/file67880.pdf). However, the signs for a strong economic recovery are poor – stagflation looks increasingly on the cards with rising prices and falling projections of growth – and the deficit in 2015 and the years immediately following may well be considerably higher than the projections. It also assumes that no other non-financial disaster strikes. This could well happen with the Coalition’s plans to privatise more and more of public provision. The major problem with this, apart from introducing the profit motive, is that private businesses can fail.
If they are providing essential public services they cannot be allowed to fail which means the taxpayer will have to step in. At the moment there is a potential disaster just round the corner with the care home provider Southern Cross in deep financial trouble. (http://www.guardian.co.uk/society/2011/may/25/southern-cross-care-homes-in-balance). The company caters for 31,000 of the old and vulnerable. There is no way other private providers could take up the slack. That would mean the taxpayer stepping in either with preferential loans to the company, which would almost certainly be challenged under EU competition law, or taking over the business wholesale.
That is just the net public debt. What the unadjusted national debt would be in 2015 can be no better than a guestimate. If the publicly owned shares in the banks are sold that would reduce the unadjusted figure, but there is no guarantee that the money put in
when the banks were on the verge of failing will be recovered in full. Even if they are sold for enough to cover the money put in directly by the taxpayer this would only be a small part of the overall costs of the banks’ rescue: .
“The Government has pumped around £45 billion into RBS and £20 billion into Lloyds – holding stakes of 84% and 41% respectively – although the taxpayer is currently sitting on almost £20 billion in paper losses on the holdings.” (http://money.uk.msn.com/news/articles.aspx?cp-documentid=152384309)
If the shares are not sold, assuming no other financial disaster then the unadjusted debt will probably be in real terms similar to that between adjusted and unadjusted debt in 2011). However, that is a very big assumption because the UK may not be out of this financial crisis by a long chalk. UK financial institutions, especially those providing mortgages, still have a good deal of potentially toxic debt. Those struggling with
mortgages have been switched to easier terms, especially interest only repayments http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/8548745/Banks-accused-of-using-mortgage-debt-leniency-to-flatter-numbers.html) . In addition, in the past six months UK banks have been going much more heavily in UK Government gilts (http://www.telegraph.co.uk/finance/economics/gilts/8550716/Banks-buy-bulk-of-39.8bn-of-new-gilts.html). This has the effect of another spate of quantitative easing. That will feed through into ever greater inflation (inflation is already high) which will eventually lead to much higher interest rates. That will drive many mortgage holders over the edge. If the UK property market collapses, that will seriously undermine the UK banking system and could well lead to other taxpayer bail-outs.
Even if things go well (well in the context of what the coalition is aiming for) the unadjusted debt would probably be in £,2500- 3,000 billion in 2016/17. That would leave Scotland with a starting national debt of £200 – 240 billion. An independent Scotland would find borrowing money would be rather expensive because of the weakness and small of the economy would make it a far riskier bet than lending to the UK, but suppose
five per cent interest was paid, that would be £10-14 billion a year to service the Scottish debt.
That would not be the full debt Scotland would have to take on. There would
also be a proportionate Scottish share of (1) UK’s PPP and PFI obligations at the time of independence, (2) the funding of UK public sector and EU pensions earned up to the advent of independence and (3) other UK debt taken on up to the time of independence.
There would also be the need to fund council debt which is not related to PPP/PFI/or local authority pensions, although that could be a mix of national Scottish funding and local authority taxation.
PPP and PFI present a problem because the cost is spread over 20-30 years and there are renegotiation clauses at various points in the contract; contracts are sold on so the reliability of the contractor can change and when shove comes to push the taxpayer is a faced with a choice between paying the contractor more or seeing the project collapse. (see http://livinginamadhouse.wordpress.com/2011/01/27/ppp-and-pfi-buy-now-pay-later/). Because of this it is impossible to give an accurate figure for the cost of a contract and the payments being spread over a long period have persuaded government statisticians not to include the full cost in the UK national debt. The complications can be seen here. (http://webarchive.nationalarchives.gov.uk/+/http://www.hm-treasury.gov.uk/d/psfnewsrelease_aug06.pdf). To give an idea of scale of allowances made by the statisticians, in 2006 they added £4.95 billion to the net debt.
Estimates of the amount to be repaid under PPP and PFI are around the £200-230 billion mark. For example, “Figures obtained by this newspaper [Daily Telegraph] through Freedom of Information requests reveal the full, mind-boggling cost of the Private Finance Initiative (PFI) upon which the last government relied to fund its public sector infrastructure projects. More than 900 schemes have been completed with a total capital value of £56 billion – yet the amount the taxpayer will have to repay currently stands at £229 billion.” (http://www.telegraph.co.uk/comment/telegraph-view/8279753/Gordon-Browns-poisoned-PFI-legacy.html24 Jan 2011). Eight per cent of £229 billion would be £18 billion.
Public sector pensions for those working for the UK also do not have to paid for immediately. Here are the National Audit figures for 2009:
“•Total payments to more than 2 million pensioners in the UK’s four largest pay-as-you-go pension schemes (also known as unfunded schemes – where current employee and employer contributions are used to pay current pensions) were £19.3 billion in 2008-09,
a real terms increase of 38 per cent since 1999-2000. This is driven by more employees retiring each year, which is a substantially more significant factor than longer lifespans.
“ •Employee contributions of £4.4 billion reduced the taxpayer’s share of costs to £14.9 billion in 2008-09. The employee element grew by 56 per cent in real terms since 1999-2000 because staff numbers and contribution rates have increased.” (http://www.nao.org.uk/publications/0910/public_service_pensions.aspx). Eight per cent of (15 billion is £1.2 billion.
The individual costs of Eurocrats’ pensions are high but not massive in in the context of national budgets: “Contributions by UK taxpayers to the pension pots of EU civil servants will jump to £350m a year by 2040, the report showed. “European taxpayers will have to stump up a total of £85bn in the next 50 years to pay for the comfortable retirements for officials.
“The total contribution from Britain in that time could be an astonishing £8.5bn. “http://www.thisismoney.co.uk/pensions/article.html?in_article_id=515300&in_page_id=6#ixzz1O27PaX00). Scotland would have a liability of around £1 billion spread over 30 years.
There is also the question of past transfers of English money to Scotland. The SNP’s claim that the oil and gas tax revenue has exceeded the money received from the UK treasury is wildly wrong. In 2009 a Scotland Office paper “Scotland and Oil” dealing with the tax
income from oil and gas fields around the UK painted a rather different picture. It concluded that:
“• If all North Sea oil revenues had been allocated to Scotland there would only have been 9 years out of the last 27 when Scotland’s finances would have been in surplus.
• Including all North Sea oil revenues the last year of surplus was in 1988-89 and since then there has been 18 years of annual deficits with Scotland’s spending being greater than the tax raised in Scotland.
• Even if all oil revenues had been allocated to Scotland the total deficit would have outweighed the total surplus by £20bn since 1980-81. “ (http://www.scotlandoffice.gov.uk/scotlandoffice/files/Scotland%20and%20Oil%20-%20Background%20paper.pdf)
So there you have it, the official view is that even if all the oil and gas revenues were allocated to Scotland they still would not pay their way. Of course, a substantial part
of the oil and gas tax revenue would not go to Scotland because of the fields in English waters. Exactly how much is debatable, but most of the remaining gas is in English waters, viz:
“The SNP claims that Scotland would receive 95 per cent of oil revenue, but its calculation is based on the total revenue from oil and gas. Its opponents say that they do not take into account the large number of gas fields in English waters.
“THE EXPERT SAYS: Prof Haszeldine says: “The vast majority of the oil is in Scottish waters. With practically all of the gas in the UK in the southern North Sea, that is in ‘English’ territory.” He says it is hard to separate the revenue from oil and gas. “(http://thescotsman.scotsman.com/politics/Can-oil-and-gas-fuel.2834598.jp)
It would not be unreasonable to add £30-40 billion to the Scottish national debt to cover the discrepancy between what Scotland has paid in to the UK Treasury and what they have taken out since 1980.
There is also the question of a disproportionate public sector employment being deliberately created in Scotland to boost the economy at the expense of England. This includes such things as the Faslane nuclear submarine base and the administration of much of England’s benefits system. Around 60% of current Scottish GDP is derived
from public expenditure and this is projected to rise to nearly 70% by 2012 (http://www.telegraph.co.uk/news/knews/scotland/4217793/Scotlands-dependence-on-state-increasing.html). I would not care to put a figure on what this has been worth to Scotland but it must be billions.
Finally, in the 273 years prior to 1980 when there was no major oil and gas tax revenue. During much of that time Scotland had favourable treatment both in terms of taxes raised in Scotland and money sent there from the UK Treasury. This imbalance was built into the Act of Union:
“Clause IX. THAT whenever the sum of One million nine hundred ninety seven thousand seven hundred and sixty three pounds eight shillings and four pence half penny, shall be enacted by the Parliament of Great Britain to be raised in that part of the United Kingdom now called England, on Land and other Things usually charged in Acts of Parliament there, for granting an Aid to the Crown by a Land Tax; that part of the United Kingdom now called Scotland, shall be charged by the same Act, with a further Sum of forty-eight thousand Pounds, free of all Charges, as the Quota of Scotland, to such Tax, and to proportionably for any greater or lesser Sum raised in England by any Tax on Land, and other Things usually charged together with the Land; and that such Quota for Scotland, in the Cases aforesaid, be raised and collected in the same Manner as the Cess now is in Scotland, but subject to such Regulations in the manner of collecting, as shall be made by
the Parliament of Great Britain.” Act of Union (https://englandcalling.wordpress.com/the-act-of-union-1707/)
The population of England was five times that of Scotland in 1707. Had Scotland paid the tax listed in Clause IX at the same rate as England they would have paid £400,000. Instead they were required to pay only £48,000, roughly a ninth of the pro rata sum.
For much of the time between 1707 and 1980 Scotland was poor (which meant less tax being collected) and from the time of welfare payments being instituted for the UK as a whole in the early years of the last century , Scotland has had a higher take up than England.
The accumulated sum (including compound interest) resulting from this favourable treatment would be colossal, far beyond what Scotland could afford,. However, it is a useful political mallet with which to thump the SNP if they start claiming all the oil and tax revenue and demanding compensation for defence equipment and installations, embassies and such forth.
All those obligations and difficulties have to be set against the small size of the Scottish economy. No official GDP measure is produced but the ONS 2009 figure for Scottish Gross Value Added (GAV), which is GDP without taxes (less subsides) on products,
was £102,552 billion (http://www.statistics.gov.uk/pdfdir/gva1210.pdf). The GDP today is in the region of £130-140 billion, with around 60% being from public spending. In 2010 total public spending in Scotland was £52 billion (that is devolved -health, education and so forth- and non-devolved expenditure such as benefits)http://www.ukpublicspending.co.uk/Scotland_country_spending.html.
It is rather difficult to see how an independent Scotland could service a national debt which could be £300 billion or more. At five per cent that would be £15 billion a year. There is also the risk that an independent Scotland might have to pay more than five per cent because they are a small economy with little private enterprise. If they join the Euro or retain the pound they will be subject to the decisions of Westminster or Brussels which may not be in Scotland’s interest. It is a less than encouraging picture.