George Kerevan: Economic autonomy rates more than a mention

Published on Wednesday 15 June 2011 17:05

Political independence would not necessarily saddle Scotland with an insurmountable debt problem

AS EVER, my good friend Bill Jamieson gets to the heart of the fiscal question facing an independent Scotland. Writing in yesterday's Scotsman he says: "The biggest constraint is not the UK government but an era of deep public scepticism - in the US, Europe and at home - over debt, and the fears worldwide of default."

There is no doubt that Scotland could join the other 192 independent member states of the United Nations if it so wished. Our GDP per head (assuming our geographic share of North Sea oil) would put us in the top 20 richest economies on the face of the planet. Though few of the Unionist nae-sayers mention this obvious point.

Freed of the London-centric policy constraints of the last 30 years - which have left the Scottish economy under-performing consistently compared with the UK average - I would expect independent Caledonia to pick up growth. Again, not a feature of the independence argument that our opponents dwell on.

The potential problem lies elsewhere. Could the government of an independent Scotland support the existing level of public expenditure without recourse to borrowing that would, in effect, hinder growth? Worse, would a newly independent state, born in the midst of the current global fiscal crisis, be able to fund even its existing level of indebtedness; ie its inherited share of the UK national debt?

Would it not be more likely that the big international credit agencies - Standard & Poor's, Moody's, Fitch - would downgrade Scottish sovereign debt, thus forcing Holyrood to pay more for its borrowing than the old UK Treasury. This because an Edinburgh government would have no track record, plus a high level of public expenditure to begin with. If so, public spending might fall and interest rates rise compared to their pre-independence levels. Who is going to vote for that?

Let's examine the data. What level of public spending will Holyrood inherit at independence, circa 2015? The most current figures are found in the last edition of the independent Government Expenditure and Revue Scotland (GERS) report, which has been published annually for the past 16 years. According to GERS, in 2008-9 total public sector expenditure for Scotland (Holyrood plus Westminster) was 56.5bn, including a share of the UK government's bailout of the banks.

Assuming a geographical share of North Sea oil revenues, GERS says the Scottish public sector revenue account was in surplus to the tune of 1.3 billion, which would give the Scottish Government a high credit rating. True, if you add in capital spending funded by borrowing, there was a net deficit of 3.8bn. But that would have been under 3 per cent of GDP, which would win the European Union and IMF seal of good housekeeping.

Verdict: an independent Scotland would be fiscally robust.Critics will ask: What about the recession? Since 2008, when the GERS figures were calculated, deficits have soared - as they should to counteract unemployment. What will the Scottish budget look like at the time of independence, circa 2015, given this spending? The answer is in the current Scottish Government budget forecast: 28.5bn for the Holyrood component (defence and welfare is funded by Westminster). That's less than in 2010-11, when the figure was 29.2bn.

Which means that public spending in Scotland is falling absolutely and as a proportion of GDP. Verdict: If I were an analyst in an international rating agency in New York, I'd be raising independent Scotland's credit listing. I might even expect Scotland to be a net exporter of capital.

Critics might reply this is only the case because the Treasury in London has tightened the fiscal screws on Holyrood. True, but that's exactly my point. The March 2011 UK Budget aims to eliminate Britain's structural deficit by 2014-15, with a projected UK and Scottish surplus thereafter. So Scotland would start independence with its books in the black. Fiscally, Scotland is no Greece or Portugal.

But what about servicing the inherited national debt - one swollen by the recession? If you apportion Scotland's share of total UK debt by spending per head, it comes to around 110bn this year, as calculated by the rightwing Institute of Economic Affairs. If you assess by population share, the number is nearer 91.5bn. However, as Bill Jamieson rightly points out, UK national debt is slated to go on rising, which means an independent Scotland in 2015-16 could have a national debt of 128bn to service.

Scary? No, because the true test is not the absolute figure but the ratio of debt to GDP. If we take a very conservative view of economic growth over the next five years, and assume a Scottish GDP of 145bn by 2015 (where it was at the start of the downturn) then independent Scotland's debt: GDP ration would be circa 88 per cent.

That's too high - above 80 usually slows growth - but not "scary" as suggested by the IEA, when you have to worry about interest rates soaring. Debt in an independent Scotland would be in line with France (84) and the United States (93). The fiscal bad boys are in a different league: Greece (130), Iceland (115) and Belgium (100). With growth higher and UK borrowing levels less severe, Scotland's debt ratio could even be less than 80, which are calm waters as far as the rating agencies are concerned.

But what of North Sea oil revenues, which we are always told are "volatile" and so add uncertainty to government revenues? Norway has this exact problem. Worse, those pesky Norwegian social democrats have been expanding public spending rather than cutting it.Here is the latest sovereign credit evaluation of independent Norway by from Standard & Poor's:

"In our view, the Kingdom of Norway benefits from a resilient economy, with very strong fiscal and external positions and the government's track record of prudent macroeconomic policies. We are therefore affirming our 'AAA/A-1+' sovereign credit ratings on Norway."