Yesterday the Scottish Government produced a paper where estimates are provided of Scotland's historical notional share of UK debt interest payments and public sector net debt.
The paper identifies UK public sector net debt at the end of 2011-12 as £1,100 billion, which amounted to 72% of UK GDP. Applying a per capita share to Scotland, produces an estimate for Scottish public sector net debt of £92 billion. This amounts to 62% of Scottish GDP, since with a geographical share of oil Scotland's GDP per capita is estimated to be greater than the UK.
One can accept this estimate provided one does not then conclude that the burden of debt in an independent Scotland is ten percent points lower than the UK. We cannot conclude this because, as I and others have noted, an independent Scotland will be faced with a higher interest rate on its long-term government borrowing than the UK.
More controversially, the Scottish Government's new paper goes on to estimate an illustrative historic share of UK net public debt. The Scottish Government describe this estimate of Scotland's net public debt as being based on:
estimates of public spending and tax receipts in Scotland over the past thirty years, in other words, on the basis of what Scotland has actually contributed to UK tax revenues
On this basis, the Scottish Government estimates Scotland's share of UK net debt to be £56 billion, equivalent to 38 per cent of GDP.
These estimates lead Deputy First Minister, Nicola Sturgeon to conclude that:
Both of the methodologies show that Scotland's estimated share of national debt takes up a smaller proportion of our economy than is the case for the UK - which means that in all circumstances Scotland will be better off with independence.
I have already noted that these estimates ignore the cost of borrowing, which is likely to be higher in an independent Scotland. But a moment's further thought should lead one to question the Scottish Government's illustrative historic calculation.
First, it seems a reasonable logical argument that as part of the United Kingdom Scotland should broadly be expected to share on a per capita basis in UK public spending, taxation and debt. Asking Scotland to take a per capita share of UK debt if Scotland decided to leave the UK union would seem to be reasonable, since everybody in the UK might be said to be in the same boat together.
However, the Scottish Government suggests that a historic calculation may be more appropriate. But in computing their 'historic' estimate they confine the calculation to the cumulated fiscal balance, including a geographic share of oil revenues, since 1980/81. This is then expressed as a ratio of the cumulative UK deficit over the same period (5.1%) and that ratio is taken to be Scotland's notional share of UK public sector net debt (£56 billion).
But if we are to compute Scotland's share of UK debt on an historic basis, shouldn't we also allow for special Scottish factors that directly affected the level of UK public net debt?
One obvious and significant omission is the bailout of the two Scottish banks in 2008-09.
The National Audit Office estimates that the amount of cash - requiring to be borrowed - for the bank bailout was £124 billion. The share of the two Scottish banks amounted to £67 billion. If we assume that a population share of this number is allowed for in the Scottish Government's 'historic' estimate, this leaves a further £57 billion to be added to the £56 billion debt estimated by the Scottish Government. £113 billion of debt amounts to 77% of Scottish GDP including a geographical share of oil value added.
The new estimate is shown along with the Scottish per capita estimate and the UK net public debt share in the following chart
On this basis and adjusting to gross debt figures as the Scottish Government do in their Chart 4, Scottish gross debt on an historic basis would rise from 44% to around 90%. This would raise Scotland in the debt EU-15 debt ranking from the Scottish Government's rank of 14th from 16 (adding Scotland to the EU-15) to 6th from 16.
This, and remembering the point about borrowing costs, certainly doesn't appear to support Nicola Sturgeon's contention "that in all circumstances Scotland will be better off with independence."