Bill Jamieson: No escape from scramble for assets

Published on Tuesday 14 June 2011 16:51

Disengaging from the UK will require give and take if the balance sheet is to be reconciled

IF YOU thought the bunfight over Scotland's share of UK debt was off to a flying start, wait till we get to a carve-up of the assets. A claim to UK assets an independent Scotland would most certainly have if we are to be apportioned a chunk of the UK national debt.

Credit and debit, assets and liabilities: they cannot be assessed in isolation. They go together.

Fast and furious though this debate has already been (is it really just six weeks from the Holyrood election and we're into this?) it has barely got to the southern slopes of consequence.

For when we set off down the road of sovereign borrowing and debt and liability apportionment, a similar apportionment must of necessity follow on UK assets.

This is where the "break-up of Britain" starts to take real and tangible effect. And this would be the central ground of negotiations between the UK and the SNP administrations were voters in Scotland to say "yes" in a referendum to initiate such discussions.

Both sides stand to reap a whirlwind of unintended consequence. The smoothing rhetoric of gentle, velvet parting could quickly pass to grim and acrimonious divorce. And almost all the acrimony of divorce is over the division of assets.

Until now the argument has been that gushing North Sea oil would keep an independent Scotland afloat. But this is a highly volatile revenue resource. And it is in decline. Total UK oil and gas revenues hit 9.2 billion in 2010-11, having peaked at just under 13bn in 2008-09.

I am grateful to the economist Tony Mackay for the following. Assuming that oil prices stay above $100 per barrel (in real terms), he expects the tax revenues to decline at an annual average of at least 10 per cent. That is greater than the forecast decline in production. But the capital and operating costs for new fields are rising, particularly for those now being developed in the West of Shetland area. On this assumption, the revenues would fall to about 5.4bn in five years and 3.2bn in ten years. The decline would obviously be greater if there were falls in oil and gas prices.

So prudence alone would drive us to look at other assets. Where might the Scottish administration start? The UK does not have a treasure trove of assets or a sovereign wealth fund such as Norway. Dr Tom Fearnley, its investment director, was in Edinburgh this week for an outstanding conference on soveriegn wealth funds at the University of Edinburgh Business School. Its giant global pension fund, in which a large share of its North Sea oil revenues has cascaded over 20 years, has soared to more than 365bn. It has overtaken Abu Dhabi to be the biggest sovereign wealth fund in the world.The SNP has long drooled over the Norway model and used it to castigate the UK government for frittering away our oil wealth. Now the cupboard is bare - almost.

Talks on divvying up the asset side of the UK's deeply incarnadine balance sheet could usefully start with a fresh valuation of our gold and dollar reserves. Even after Gordon Brown's disastrously-timed gold sales early on in his chancellorship, we still have gold reserves of 6.8bn and foreign exchange reserves of 21bn. Adding in bibs and bobs such as IMF Special Drawing Rights and securities and other claims, the total comes to 40.1bn. Scotland might fairly claim a per capita share of these to go with the debt apportioned to us.

Then there is that UK Domesday Book, the National Asset Register. The team around finance minister John Swinney could usefully leaf through its 1,100 pages to seek out assets on which a pro rata claim could be made.

There's central government properties in Westminster of 146 million (a re-valuation surely due here) and the constitutional offices (surely redundant post-independence) at 903m.

Think of the rich pickings in the Foreign & Commonwealth Office (fixed assets 1,520m) or the Offices under the Chancellor of the Exchequer (3,100m) and the capricious delight that could be taken in seeking a Scottish share of HM Treasury fixed assets (1,700m). We could pick and poke and peck for a pro rata share of revenue earning operations such as air traffic control and the Tote, all the way down to CDC, formerly the Commonwealth Development Corporation (2.1bn).

It may seem absurd, callous even, to contemplate a claim on an organisation pledged to economic development and poverty alleviation in former Commonwealth countries. But this is where break-up could take us.

If we step down the road of debt apportionment this is no time for jellylegs when it comes to assets. These, as well as the liabilities, must of necessity go into the pot if we are to have a sovereign debt rating worth the name.

But what apportionment exactly? A central requirement in these negotiations is that apportionment is done on a basis that is transparent, accurate and fair. Several ways have already been offered in calculating our share of UK debt. Mr Swinney disputes a debt estimate based on Scotland's share of UK spending. This came up with a terrifying figure of 110bn. Others, such as the estimable Professor David Bell, have suggested a debt share based on our 8.4 per cent population share. This would give a lower figure for 2010-11 of 91.5bn.However, as central government net debt will continue to rise (to 1.3 trillion in 2015-16), Scotland's share based on population would be 127.9bn that year and the annual debt interest bill would be 5.6bn: a colossal challenge.

Remember also that this does not include unfunded pension liabilities or PFI obligations and does not allow for the smaller proportion of taxpayers in Scotland's population relative to the UK.

Even if we had a low debt apportionment, creating a Scottish sovereign wealth fund would pose problems. How much oil revenue should be set aside, given the demands of current spending obligations and those debt interest payments? The fund would also need to be at arm's length from the government to prevent it being overwhelmed by pressure to invest on political considerations. And we would need a supportive population, ready to sacrifice today's spending for tomorrow's safety cushion.

But Scotland will need an asset pile of sorts if we go down the independence road. The biggest constraint is not the UK government but an era of deep public scepticism - in the US, in Europe and here at home over debt, and the fears worldwide of default.