What follows is an indicative picture of the ‘limbo’ period between a hypothetical ‘Yes’ vote and Independence Day – and a question to which we can find no immediate answer.
19th September 2014, Scotland has voted ‘Yes’ to independence. We have a scant 18 months to get all of the key issues sorted before March 2016 which has been set to host Independence Day.
While some matters would not have to be fully completed, or even necessarily begun – like the establishment of diplomatic missions, a full defence scenario, NATO membership and EU relations – before Scotland became an officially independent country, there are many that would simply have to be designed, resourced, established, tested and in operation on Day 1.
These include, in alphabetical order:
- Coastguard, rescue and environmental protection services
- Cross border haulage and freight
- Currency and lender of last resort security
- Data protection
- Defence – rudimentary in the first instance, manned and equipped to deal with national emergencies and civil unrest
- Economic policy
- Energy security
- Financial regulations, regulators and watchdogs
- Foreign Policy
- General Register of Scotland
- Immigration and border controls
- Import and export regulation and control
- National security and intelligence
- Postal service
- Social security – the spectrum of benefits
- Tax regimes, tariff barriers, inland revenue and customs
- Trade agreements
- Vehicle licensing
- Water security
Given that the Scottish Government has, to date, been unable to get pieces of relatively straightforward legislation right – such as the 2010 Schools [Consultation] [Scotland] Act and the 2010 Crofting Reform [Scotland] Act – one has to ask what the realistic chances are of getting all of this up and running in competent and serviceable shape for Day 1 in March 2016?
The BIG question
However, a key issue which has not yet been mentioned anywhere is: Where will the money for all this come from during that 18 month setup period?
Scotland would then formally be en route for independence but would not be independent until Independence Day 18 months later.
Scotland would of course have to pay for its own independent setup arrangements – and the costs will be astronomical.
One single issue we’re looking at is an unparallelled expansion of the civil service in very short order – but the costs of recruitment, establishment and operation before Day 1 cannot be paid for in any way from our UK revenue allocations.
Then, for example, expert assessment of the work and cost of sorting out the situation with pensions alone suggests that we would have to build a system the equivalent of the NHS – and we all know what that costs.
Taxpayers in the continuing United Kingdom could not be expected or asked to subsidise out setup costs in any way.
We would have to borrow and to service the borrowing.
But on what basis could we borrow?
We would not be an independent country issuing our own bonds to generate loans.
Even after Independence Day, the cost of borrowing is a major issue in itself since with no independent fiscal and economic track record, the initial borrowing rates we would have to pay would be higher than they are within the United Kingdom.
But before Independence Day, how could we even access borrowing to support our setup costs?
Between Decision Day and Independence Day, Scotland would be in a fiscal limbo, en route to becoming independent but not independent and therefore in a credit-bind to which it is hard to see an immediate solution.
Share of the UK National Debt
It it can be found at all, the cost of what Scotland will have to borrow in that 18 month setup period – and afterwards to finish the job – will be on top of the legitimate Scottish share of the UK National Debt on Day 1, which we must accept.
The issue here is that Scotland has traditionally received more from the allocation of UK public spending than its share of the UK population supports. We get about 10% of the UK total spend for a population share of around 8.4%.
UK national debt is forecast to hit around £1.4 Trillion by 2014. We are already at £1.2 Trillion.
If its share of the national debt is allocated on the just basis of share of spending, Scotland would take on a Day 1 debt of £140 Billion. The pre-Day 1 setup costs of independence – which have not even been calculated – would be on top of that.
We cannot keep on simply uttering the mantra of ‘Oil’ in response to questions of how we will pay for everything we will need to cover our obligations and our ambitions.
The UK Office of Budget Responsibility predicted in January 2012 that oil tax revenue will drop from £6.7bn that year to £4.1bn by 2017-18.
However, assuming that, at best, it does not drop but remains at 2011 levels of £6.7 Bn per annum, servicing our inherited debt of £140 bn alone – before the added debt of setup costs and at an optimistically estimated rate of 5% – would cost us £7 Bn per annum – more than the total UK oil tax revenues at 2011 standstill rate.
The most generous settlement Scotland can expect in a share out of the North Sea would be based on its geographical and not its median share. A geographical share would see Scotland get 90% . This would at 2011 revenue rates, yield £6.3 Bn to pay annual interest of £7Bn on our legitimate inherited share of the UK National Debt alone.
We would be in deficit from Day 1.
The cost of the borrowing for our setup costs of independence – capital and revenue – would be on top of that and, if such borrowing could somehow be accessed, borrowing costs would be at a premium because:
- We would not have the national status to borrow.
- We would have no fiscal or economic performance track record as an independent country, which might be used to set an interest rate. We would therefore be into a ‘suck-it-and-see’ estimated rate – and the financial world, in such circumstances, operates on very conservative estimates.
- We would not, in that limbo period, have a supportable business plan for the nation.
- We would have a situation where our single major asset, itself depreciating, would be, from the outset, inadequate to pay our annual interest on inherited debt alone.
Arguments that our oil and gas resources are not depreciating, based on the substantial estimated reserves, are deliberately deceptive.
Extracting from those reserves – the most difficult and costly to get out – will be very significantly more expensive that the more accessible assets the industry is naturally exhausting first.
Then there is the understated fact that the entire infrastructure of the North Sea oil industry is in immediate need of reinvestment, which, as and when that comes, will also impact on the tax revenues to be expected from the sector.
Meanwhile, to buy votes, the Scottish Government plans to maintain and actually expand spending on social costs and universal benefits, with a major query on the ongoing legality of charging tuition fees to university students from the continuing UK, where they will be free to students from elsewhere in the EU.
Evidence for the Scottish Government’s recent awareness of the reality of the situation has come from declarations, first from the Deputy First Minister and then from the First Minister, that Scotland might simply refuse to accept its fair share of the national debt – starting its independent career as a cavalier defaulter on due debt.
The First Minister’s flotation of this damaging folly was embarrassing schoolyard stuff: if they [the continuing UK] won’t let us have the pound, we won’t take the debt.
It ought not to be hard to see why, as former supporters of Scottish independence, as we have addressed the evidence of the various impacts of its implementation, we have, on reasoned analysis, changed our view.