WHAT shape are Scotland’s public finances in? The Scottish Government publishes Government Expenditure & Revenue Scotland.
The current version shows borrowings £12.1 billion (the fiscal deficit), £53.1bn tax revenues including geographical share of oil revenues (the most advantageous method to Scotland), £65.2bn total public expenditure. To match tax collected, public spending would need to reduce to approximately £46bn (around 30 per cent of the borrowed £12bn is reclaimed in tax). This represents a cut of 25 per cent of public sector spending. £41bn was spent on health, social spending and education so most cuts would fall here.
Quantitative Easing plays a large part in financing this borrowing. In principle QE works like this; the government sells bonds to banks who exchange these at the Bank of England for money created by QE. Risk to the commercial bank is low so the government pays low interest rates, for example 3 per cent. When a commercial bank exchanges bonds the BoE charges interest, say 2 per cent, which is returned to the UK Treasury. The effective net borrowing rate in this example is 1 per cent. The UK created £375bn by QE during the financial crisis. All regions of the UK, including Scotland, benefit.
How might Scotland have been affected if not for QE? Nations lacking QE have been forced to pay commercial rates and cut spending to more closely match tax receipts. Borrowing £12bn per year for ten years on ten-year bonds at commercial rates, say 6 per cent, means £192bn debt. Against annual tax revenues of £53bn that is the type of rate of debt accumulation which has caused commercial banks to stop buying bonds from some Eurozone governments. These governments have no access to QE even although they are in formal currency union so have little choice but to cut public spending by 20 per cent to 40 per cent in the cases of Ireland, Greece, Spain and Portugal.
Everyone must reach their own conclusions on how Scotland would finance the fiscal deficit without control over our central bank. Some say we are not like Greece, Ireland or Spain but the countries many like to compare us too; Denmark, Norway and Sweden all have their own central banks and lender of last resort and can manage money supply and interest rates in sharp contrast to the SNP’s proposal for an independent Scotland.
Dr Duncan Mackenzie, via email