John McLaren: Negotiations over UK debt crucial

Danny Alexander and David Cameron. Picture: Phil Wilkinson
Danny Alexander and David Cameron. Picture: Phil Wilkinson
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Did anyone really expect anything different from yesterday’s pro- and anti-independence economic papers than a welter of partial statistics that simply reinforced their existing positions? If they did they were, again, disappointed. Nevertheless, some interesting points did emerge.

The No campaign got off to a bad start with reports that the costs of separation had been exaggerated, according to one of the authors used in the UK government’s report. This is a repeated weakness in the UK government’s papers – they are still partial in their use of analysis.

The Treasury also found that Scotland’s annual deficit (ie, expenditure on services being higher than tax revenues to pay for these services) up to 2018-19, and well beyond, remains relatively higher than the UK’s.

Enter the Scottish Government with its own estimates of future oil and gas revenues for Scotland. These range from Scenario 1, based on the forecasts made by the Office for Budget Responsibility (OBR), up to Scenario 6, with each using higher oil production and price levels. As a result, scenarios 2 to 6 show Scotland receiving higher oil and gas revenues than scenario 1. Nevertheless, none of these higher scenarios on their own would end up with Scotland having a better fiscal balance than the UK, in 2016-17, or most other years.

This can be seen in the second paper published yesterday by the Scottish Government, on the outlook for public finances. Using a scenario where oil revenues for 2016-17 are more than twice the size forecast by the OBR (£6.9bn as opposed to £2.9bn), the Scottish Government finds the country’s deficit is 2.8 per cent of GDP, as opposed to the UK’s 2.4 per cent.

However, these figures are based on Scotland assuming its population share of UK debt and associated debt payments post-independence. If, as the Scottish Government outlines, the share assumed was lower than its population, then Scotland’s position eventually becomes better than the UK’s.

This suggests the negotiation over an independent Scotland’s inherited share of UK debt is becoming ever more crucial. Unfortunately, we have made little, if any progress in understanding how such a settlement might be reached.

• John McLaren is honorary professor at Glasgow University’s Adam Smith Business School