In an uncharacteristic display of chivalry, the government has agreed to continue to guarantee Britain’s entire £1.2tn debt, even if Scotland votes in favour of independence. The idea is to stave off market nerves about who will take responsibility for Scotland’s debt after the referendum in September, which could drive up the cost of borrowing. Which would be great, if the markets were actually nervous about this…
The plans came out in a note issued by the Treasury this morning, in which it said the UK government would ‘in all circumstances honour the contractual terms of the debt issued by the UK government’ (ie. ‘don’t worry – we’ll pay up’). Under the terms of the deal, the British government will take care of debts, and Scotland will pay its share straight into British coffers.
Critics are worried it means a fledgling Scottish government could, as a consequence, just sidestep its responsibilities and rely on the UK to pay its share of the debt. The Treasury, though, is convinced that it won’t.
‘If Scotland reneged on what it owed the rest of the UK, it would be an international pariah in the markets,’ pointed out a source in this morning’s FT.
For its part, Scotland is more concerned about making sure it only pays its ‘fair share’ of debts. In the past, first minister Alex Salmond has said Scotland will only take on the UK’s liabilities if it gets to keep on using the pound.
It’s all very gallant, but this could all be a moot point. This is a topic on which markets have so far stayed resolutely un-jittery, primarily because the ‘Yes’ campaign has the support of just one-third of voters.
So why is the government doing this? It could have something to do with the fact that working out the actual amount Scotland itself owes is far from straightforward. The Treasury reckons that 'of the £85bn UK local government gross debt in 2012-13 around £10bn, or 12%, is debt accruing to Scottish local authorities'. According to the Yes campaign, if you did it on a per-capita basis, net debt in 2017-18 (when Scotland goes independent) would be £126bn, or 72% of Scottish GDP. Or if you base it on Scotland's previous contributions to UK public finances, it's £40.6bn.
Still: apparently the Treasury has had ‘several approaches’ from investors who are interested to know what would happen if Scotland did gain independence. And with UK 10-year gilts at 2.87% (down from a decidedly unpleasant 3% in September), the government is keen to do all it can at the moment to keep borrowing costs as low as possible. Fair enough…