THE Treasury’s most senior civil servant has warned an independent Scotland would have to pay higher interest rates for its debt finance than the United Kingdom, as it seeks to convince the world’s investors it is a safe bet.
Sir Nick Macpherson, the Treasury’s Permanent Secretary under Gordon Brown, Alistair Darling and George Osborne, also warned that Scotland’s big finance houses had the vast majority of their business south of the border, where they could easily move after independence.
Having two systems of regulation, one for Scotland, and one for the rest of the UK would be a major obstacle to their work, he said, adding that financial institutions in Edinburgh were already demanding answers on how the new country would be run.
Macpherson, who has been the Treasury’s top civil servant since 2005, was speaking a week after he visited financial institutions in Edinburgh to discuss the potential for independence in Scotland. This week, Scottish Financial Enterprise (SFE) is likely to reiterate calls for clarity over how an independent Scotland would operate.
In Chicago last month, First Minister Alex Salmond said Scotland’s borrowing costs would be “no worse” than those in the rest of the UK. On 2010-11 figures, and with the oil taxes included, the new country would need to fund a £10.7 billion deficit to keep public services afloat.
The UK is financing its own huge deficit with the help of record low rates of interest. However, without the UK’s track record of debt repayment, Macpherson said Scotland would have to pay more. “Even countries which are pursuing incredibly credible and tight fiscal policies like the Netherlands and Finland pay a premium on the debt compared to Germany. So even on day one if Scotland was pursuing a surplus, there would probably be some sort of a premium,” he said. “It will not have the track record of the UK authorities ... all of which means it will be facing quite big risks.”
Asked at a House of Lords inquiry last week about the impact of independence on Scotland’s financial services industry, he said “it is clear they do want answers to some of the questions” being asked about “regulation, the EU and the role of the central bank”.
Macpherson’s warnings were backed up by Professor Brian Ashcroft, the head of Strathclyde University’s Fraser of Allander Institute. He said extra costs would be due to the country’s untested credit worthiness, the high levels of debt it would inherit, the volatility of Scotland’s revenues, and that – using sterling – Scotland would be unable to boost its money supply by printing more notes.
He said a fiscal stability pact with the UK Government would help reduce those borrowing costs, but added: “Even then, we should still expect the Scottish government to have to pay a risk premium in its borrowing compared to the UK.”
Owen Kelly, chief executive of SFE, said: “It is simply not possible, given the dearth of uncontested facts about how independence would work in practice, to predict how companies would respond to changes in the regulatory, fiscal or other frameworks that influence business planning.”