Scotland's Public Sector Net Debt

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."

 

Comments

[George]

This is valid point "an independent Scotland will be faced with a higher interest rate on its long-term government borrowing than the UK" Scotland would have credit rating history to base a risk factor on of browing in the open market.

[David]

why are the London activities of the banks attributed to Scotland?

[Hugh]

If the banks are Scottish debt...then why have the vast tax revenues from these banks not been attributed to Scotland...it would seem they are British while Westminster is squeezing cash from them but now that we are looking at independence,they are suddenly all ours

[Ian Brooks]

My point would simply be this:

Why does the SNP get to pick and choose how far back in time we go to decide what Scotland has and has not contributed to the UK?

Either we deal with it in terms of what is the case right now, or we go back 307 years to when it all started, find out what Scotland owes the rest of the UK if anything, and account for inflation.

Why go back to 1980? Is it perhaps because that's roughly when North Sea Oil was most productive? Coincidence?
It's nonsense.

This report also assumes that a maritime border with the rest of the UK runs all the 55th parallel, which it wouldn't because international convention is that it continues from the land border, which strikes a near North Easterly border line through the North Sea.
This, funnily enough, cut's "Scotland's Oil" from a 90-95% share to a 55% share.

[Peter A Bell]

Why would a share of the cost of the bank bail-out be attributed to Scotland on a per capita basis when there is a well established convention, at the very least, that governments are only liable for the bank operations within their jurisdiction?

And, of course, we have to acknowledge that governments are not necessarily liable at all. One might just as validly make a calculation based on an assumption that Scotland accepts no liability for banks and that the historic share of the bail-out cost is therefore zero.

[John Hamill]

Brian Ashcroft is married to Labour Party's Wendy Alexander. Just for the record.

[Ken Armstrong]

it amazes me that some folk think that the international marine boundaries are subject to what ever change they want to put into it, the movement of the boundary in 1999 was set by west minster through a back door policy without any vote, therefore should Scotland gain independence next year the international boundaries would be reestablished as they were previously, no one in their right mind could say that rUK waters lay just off Dundee, really get real.

I accept that Scotland should take a share of the current UK debt at a per capita rate, however the point regarding the "Scottish Banks" is ridiculous as the other poster mentions there is already guidelines laid out as to how any share would be dealt with in regards where the banks operations are, with that Scotlands share of the RBS and HBOS bail out would be around 10% of the total amount.

It surprises me that when the oil is talked about the full value of the 90-95% revenue is never actually attributed to Scotland to show how it would effect the balance sheets after independence. go figure it out folks, Scotland would do very well thank you and would be well placed to get rid of its debt reasonably quickly, getting to a point where it could even become a lender to rUK to help them out with their then spiraling debt...