ALEX Salmond’s case to the Scottish people ahead of next year’s referendum is built on the idea of Westminster incompetence.
Exhibit A is the unthinkable £1.2 trillion national debt racked up, largely thanks to the financial crisis, over recent years. The central task for the Scottish Nationalists, however, is not to win the blame game for who is responsible for it, but to answer the mounting questions over exactly how a new nation would deal with this toxic inheritance.
That issue was raised with urgency after a hair-raising Institute of Fiscal Studies report was published on Monday. In addition to demographic problems and a projected fall in oil income, the new nation would have to cope with suddenly being a small country with a very big chunk of debt. To get it down to 40 per cent of GDP by 2062, the IFS concluded would require a “permanent” tax increase or spending cut equal of around £6 billion. These are not encouraging numbers.
So, what to do? Scotland could simply refuse to take any of it on, say some pro-independistas. But in reality, such a move would be like announcing yourself as a new member of a club by declaring your refusal to pay any subs. Salmond has rattled the cage on the issue, but he also acknowledged last year that “we are going to have to bear our fair share of Treasury incompetence”, which would be divided either on the proportion of UK GDP raised in Scotland or its head of population.
Burdened with that legacy, some economists argue Scotland should go for its own currency. Why? Take, for example, a situation where the global oil price suddenly plummeted. Scotland would land have a whopping big hole in its finances. But England (by then an oil importer) may well be quite happy with a fall in forecourt prices. The result? The Bank of England might not see the incentive to help out, in the worst-case scenario, by printing more money to help Scotland. Given all its existing debt, it might be better to prepare for such a worst-case scenario by having your own central bank and your own printing presses just in case.
But because of the fears of a separate currency, Salmond has made it clear this is not going to happen. Perhaps a solution to his debt problems lies with a suggestion by the respected National Institute of Economic and Social Research (NIESR), which recommends that Scotland and the rUK do an oil-for-debt swap, where England keeps the oil for a few years in return for Scotland taking on a lower debt inheritance. With lower debt, Scotland would then have a better chance of managing its affairs and the coming fiscal train-wreck. And, thereby, it would have reduced some of the risks inherent in using someone else’s currency.
“It’s England’s oil” probably isn’t quite the slogan the SNP has in mind ahead of next year’s referendum. But as the SNP searches around to build credibility ahead of next week’s white paper, it’s an option that deserves serious attention.