John Swinney, I read, says that once Scotland is independent, he will borrow billions to end to austerity. It is a promise he cannot make, for it may well turn out to be completely undeliverable. The conditions under which he or any other finance minister could deliver it are so narrow as to be wholly improbable.
In the interview in which he made the pledge, Mr Swinney said that he wanted to turn his back on Chancellor George Osborne’s austerity programme which envisages public spending increases limited to 1 per cent a year. Instead, he favours borrowing to increase spending by 3 per cent a year in the three financial years between 2016-17 and 2018-19.
Elaborating, Mr Swinney said that a great deal of hardship and economic difficulty could have been avoided if in 2010 the Scottish Government had been able to borrow. “My point about austerity is that the Labour Party, the Liberals, the Conservatives are all signed up to a UK austerity agenda.
“What an independent Scotland would have to do, or would have the choice to do, is do things differently and to make some of those choices I would like to have seen in 2010 to encourage growth and dynamism.”
By using the word “choice”, Mr Swinney is using a form of the time-honoured political fudge of prefacing a promise with the condition that it will be implemented “if conditions permit” and thus allowing a get-out clause if conditions don’t permit. But of course he is making the promise in the hope that many people will believe it and therefore be more likely to vote Yes.
Mr Swinney knows he cannot guarantee this. Indeed, he has, in a different context, said that he cannot guarantee it. That is because Scotland’s post-independence fiscal balance of tax revenues and public spending depend on negotiations, in this case, over the division of the national debt and the currency.
Last week at Holyrood’s economy committee, Mr Swinney was repeatedly pressed to produce figures to show how much it would cost to set up the necessary apparatus of an independent state – setting up a tax collection system, a foreign and diplomatic service, a financial industry regulator, etc.
He told the MSPs: “We cannot properly put a precise number into that analysis if it is going to be subject to negotiation and discussion with the UK government about share of assets and operational transfer of functions.”
The same applies to share of liabilities, ie national debt. But Mr Swinney does not draw the same conclusion that a “precise” number is not available, instead he is offering a very precise number of an extra 2 per cent public spending a year above the 1 per cent increase likely to come if Scotland votes No.
Assuming that total Scottish spending in 2015-16 is £67.2 billion, then the promise implies an extra £1.3bn of spending in 2016-17 above the £700 million scheduled under UK management, another £2.7bn in 2017-18, and an additional £4bn in 2018-19, or an extra £8bn in total over the three years.
Can that be afforded? A critical part of public spending in this austerity era is on debt servicing. All the public spending estimates assume that an independent Scotland will pay the servicing costs of a population share of the UK debt, which Mr Swinney has previously described as “fair and reasonable”.
In the Scottish Government’s accounts for 2012-13, the cost of this share is put at £4.02bn, which is equivalent to just under 40 per cent of the health budget, so it is a significant sum. That’s on UK debt (on the Maastricht criteria) of £1,387bn that year, which is projected to rise to £1,701bn by the planned date of independence of which Scotland’s population share would be £140bn, with annual debt servicing costs of about £5bn. So there’s £3bn of Mr Swinney’s extra £8bn gone already.
Of course, the debt share might be very different. It could be zero if the UK government refuses to share sterling with Scotland and Mr Salmond carries out his negotiating threats. Or it might be the “historical benefits” share of about £100bn if the UK government is minded to charitably accept SNP arguments.
Both are improbable. The reason is that this would not be a Scotland/rest-of-UK negotiation. Financial markets would take a very close interest and anything which made it less easy for the rUK to repay its debts (which it has guaranteed to do irrespective of a Yes vote) would result in it being penalised with higher rates on future borrowings.
UK debt is projected to be 93 per cent of UK GDP by independence day. A zero share would push that up to 102 per cent of GDP, and a historical benefits share would increase it to 96 per cent of GDP. Markets apart, given that there will be a UK general election a few months after a Yes vote, it seems unlikely that the parties will be campaigning to be generous to Scotland at the expense of rUK voters having to bear more austerity.
A population share would push up the rUK debt only slightly to 94 per cent GDP, but if politicians south of the Border were being bloody-minded, they could insist on a GDP share which would leave both parties shouldering debt equivalent to 93 per cent of their GDP and Scottish servicing costs of £5.2bn.
That would be incontestably fair, acceptable to financial markets, and also acceptable to the EU. The EU’s opinion matters, because Scotland would be seeking membership and having to meet conditions for membership, one of which would be a division of debt which does not disadvantage an existing member state – the continuing UK.
And if all that isn’t problematic enough for Mr Swinney’s end-to-austerity borrowing pledge, there is the big matter of the restrictions, should the UK agree to a currency union as the SNP say it will, that it will apply to borrowing.
If Scotland in such a union would bring advantages to sterling, as Mr Salmond claims it will, why would rUK permit them to be thrown away by excessive Scottish borrowing? A pie-in-the-sky pledge by Mr Swinney? He doesn’t even have the ingredients to try making it.