Peter Jones: Yes camp comparisons don’t add up

Ratings agencies would not, could not, give an independent Scotland the AAA rating the UK enjoys. Picture: Getty

EVERY political party and every government is guilty of bending the truth, and it is the job of journalists to point out instances when they occur. But the indyref truth-bending that the Scottish Government and the Yes campaign are engaged in is now becoming egregious, to the point of becoming downright deceitful.

No doubt many nationalist readers would retort that the same applies to the UK government and Better Together. To the undecided, this might signal that the truth lies somewhere in the middle, ie that independence would be neither as good nor as bad as either side says.

While lazy, that would be an understandable conclusion. But it would also be dangerous, for when you look at what foreign financial institutions, with no stake in either a Yes or No outcome, are saying about an independent Scotland’s prospects, they all say the same thing – taxes would have to be raised or public spending cut.

Let’s start with Moody’s, one of the big three credit ratings agencies. Last week, the media headlined the conclusion that it would give an independent Scotland a credit rating which was “two notches” below that of the UK, ie Scotland would face higher borrowing costs.

The Scottish Government airily dismissed this, pointing to a report by another ratings agency, Standard & Poor’s, which said: “Even excluding North Sea output and calculating per capita GDP only by looking at onshore income, Scotland would qualify for our highest economic assessment.”

So that’s all right then? Standard & Poor’s would give Scotland an AAA rating? No, it wouldn’t. Its report also says: “Standard & Poor’s credit ratings are determined by ratings committees. The views expressed herein have not been determined by a rating committee and do not constitute a rating or an indication of any potential Standard & Poor’s rating on an independent sovereign Scotland.”

Thus by implicitly comparing Standard & Poor’s economic assessment with Moody’s ratings assessment, the Scottish Government was comparing apples and pears, something it does a lot. It is misleading.

All that Standard & Poor’s were saying is that Scotland is a well-developed country and therefore would rank as amongst the richest nations in the world. Moody’s said much the same. Discussing the country’s GDP and economic strength, it said: “There are a limited range of outcomes for GDP per capita, but all possible outcomes point to Scotland being among the wealthiest sovereigns in the world (as is the UK).”

But, as both reports make clear, being amongst the “wealthiest sovereigns” or having the “highest economic assessment” does not automatically mean an AAA rating. The agencies take other things into account: strength of monetary, fiscal, and regulatory institutions; amount of debt and foreign currency earnings; and ability to deal with risks and external economic shocks.

Because most of these factors are unknown, and would only become partially known once independence negotiations are completed (years of track records are needed to assess institutional strength), Standard & Poor’s would be regarded as having taken leave of its senses if it awarded AAA status to Scotland.

All that can be said with any certainty is that Scotland would be awarded, in the ratings jargon, “investment grade” status. That ranges from AAA down to Baa3 (Moody’s) or BBB- (Standard & Poors). Both ranges cover ten grades of ratings, or “notches”.

Given the uncertainties, Moody’s view of a two-notch differential seems generous. It would still have a big impact. Various studies of US and European sovereign debt suggest that a one-notch downgrade equates to an additional borrowing cost of between 0.25-0.45 per cent.

These studies were on countries where all the other factors that bear on ratings assessments were known. Given that these are mostly unknown in Scotland’s case, and that as the Scottish bond issue would be relatively small and therefore subject to a liquidity premium (ie it might be difficult to buy and sell), the National Institute for Economic and Social Research’s assessment that an independent Scotland would pay a premium over interest paid by the UK of between 0.72 and 1.65 per cent for its borrowing looks entirely reasonable.

Using Scottish and UK government’s figures on shares of debt and its service costs in 2012-13, the premium would add between £840 million and £1.9 billion to Scotland’s annual cost of debt.

These are worst case figures, as we don’t know how the debt sharing negotiations would work out.

If everything was terribly amicable, the cost could be small. But if things got acrimonious, it might be that expensive. We have no means of knowing.

What we do know is that even without an extra debt cost, it is going to be very difficult to balance the books. This was the conclusion Commerzbank, a German bank with no known interest in either a Yes or No vote, came to.

Amongst many things it looked at in a recent report, it examined the Scottish Government’s white paper claim that “even when oil and gas revenues are excluded, estimated tax receipts per head in Scotland are broadly equivalent to the UK figure [and] relative to the size of the economy, public spending is estimated to be lower in Scotland than in the UK as a whole”.

In fact, said Commerzbank: “The Scottish Government is comparing revenue and spending data on two different bases, with the former on a per capita basis and the latter as a share of GDP.”

It’s another example of misleadingly comparing apples and pears.

The bank points out that if both data sets are put on a per capita basis, Scottish non-oil tax receipts are just 2 per cent lower than the UK figure, but spending is 10 per cent higher. Assessing likely future oil receipts and SNP tax cut pledges, the bank says: “It is clear that the public finance position will be heavily dependent upon future trends in the oil price and it is possible that an independent Scotland will be forced to cut spending or raise taxes beyond levels currently foreseen.”

Its conclusion on the indyref debate is a somewhere-in-the-middle one, but with a sting. “An independent Scotland,” it says, “will fare rather better than the Westminster government believes and will endure considerably more pain than the Scottish Government is prepared to admit.”

And that, rather neatly, sums up my own view.