By Richard Johnstone | 9 April 2014
An agreement between the Treasury and an independent Scotland to cover a proportion of the historic UK debt may not be enough to reassure credit ratings agencies that all obligations will be met, a report has warned.
A National Institute of Economic and Social Research analysis of the likely fiscal position of Scotland and the rest of the UK post independence found that Scotland would not have the resources to cover its share of the UK’s debt.
Total public sector debt, using the European Union’s measure of gross government debt, is likely to stand at £1.7 trillion in 2015/16, when negotiations over an independent Scotland’s obligations take place, NIESR said yesterday.
Assuming that Scotland was to inherit a share based on its proportion of the UK population, it was likely assume debts of £143bn. Based on this, and a geographical share of North Sea oil, an independent Scotland’s debt to GDP would therefore stand at 86%.
According to NIESR report authors Angus Armstrong and Monique Ebell, Scotland would not be able to take on this level of debt itself. Therefore, the country would need to establish a formal ‘IOU’ arrangement with the UK Treasury, where the obligation stayed in London but the Scottish government made annual payments to cover its share of debt interest and maturations. Based on these figures, the Scottish administration would need to find approximately £23bn in the first year, in addition to any borrowing required to meet the fiscal deficit.
The report warned that although the Treasury has moved to guarantee all UK public sector debt, the viability of a long-term IOU from an independent Scotland would be examined by ratings agencies assessing the creditworthiness of the remaining UK.
The agreement would not be viewed as a liquid asset the Assets and liabilities and Scottish independence paper stated, and agencies may therefore question whether the money will be actually be received throughout the maturation period of the debt.
Responding to the report, a Scottish Government spokeswoman said Scotland is a wealthy country with an economy that would be among the top 20 in the world in terms of GDP per capita as an independent country.
'This report shows the scale of the debts and liabilities run up by UK Governments over recent decades and which the people of Scotland will have to pay for whatever the result of the referendum.
'What this report fails to mention are the considerable difficulties the UK would have in meeting the same debt criteria that this report sets for Scotland. Whichever way you look at the figures an independent Scotland would start life with lower debt ratios than the rest of the UK and with strong public finances.'
