Banking on an uncertain future
UK debt could be at peak level at the very time that an independent Scotland has to negotiate its share, writes Alf Young
AScotland’s population share of that debt will turn out to be well in excess of £100bn.
T LAST we have it. Scotland’s date with its constitutional destiny is to be Thursday, 18 September, 2014. The Ryder Cup at Gleneagles will not be part of the festive hors d’oeuvre. Neither will the UK party autumn conferences, with their battery of airtime denunciations of the risks of Scotland going it alone. It’s 545 days and counting until we get to decide yes or no.
I’ve never been convinced of the power of an anniversary of a 700-year-old battle, another clan gathering or even – though I wish them well – the 20th Commonwealth Games coming to Glasgow that July to sway the outcome. For some, no doubt, the choice will be predominately heartfelt. And a summer of Braveheart nostalgia and sporting endeavour may warm their intent.
But for many other Scots, the head will dictate where they put their cross. And 24 hours before Alex Salmond finally revealed the date of referendum day we all got some fresh sense of what material reality will look like a year and half from now. And the prevailing fiscal realities thereafter, as Scotland ponders the consequences of whatever its choice might be.
We had George Osborne’s fourth coalition budget on Wednesday. And with it the Office for Budget Responsibility’s latest assessment of the state of the UK economy. The numbers that lays out, co-inciding as they do with the latest spasm in the eurozone crisis, this time in tiny Cyprus with its bloated banks, make scary reading.
Growth forecasts have been slashed yet again this year and next. The biggest stimulus packages are either unravelling under closer inspection (Osborne’s UK-wide mortgage guarantee scheme) or don’t kick in until after the next Westminster election in 2015 (£3 billion a year more for infrastructure over five years).
However the really jaw-dropping trend is the relentless deterioration in government borrowing and debt. All the way through to 2017-18. Despite all the coalition rhetoric about getting on top of the deficit, progress has now “stalled”, says the OBR. Stripping out all the one-off wheezes and end-of-year manipulations, the deficit now looks to be around £120bn last year, this year and in 2013-14. And when the annual deficits start falling again thereafter, they are now expected to do so more slowly than was expected as recently as last December.
As the Institute for Fiscal Studies has pointed out, for the fiscal year just ending and the two that are left before the next Westminster election, the chancellor will be borrowing £70bn more by 2014-15 than he was expecting to borrow in his first budget, in June 2010. The OBR now expects the stock of UK net debt, which stood at £1.1 trillion last year to hit more than £1.6trn in cash terms by 2017-18. From 2015 onwards the OBR now expects it to be stuck at a peak of around 85 per cent of GDP for three years in a row. If growth in the economy were to flatline for longer, UK debt breaching the 100 per cent of GDP barrier is not out of the question.
Of course, those arguing over the next 18 months for a Yes vote will be keen to squeeze any leverage they can from this fiscal disaster story. How can we create a more prosperous Scotland and a fairer society, they’ll demand, without the power independence brings to shape our own economic destiny? But peacefully breaking up a 300-year-old political union isn’t about starting with a fiscal tabula rasa. It’s about the messy business of dividing up existing shared assets and liabilities. Including that burgeoning debt mountain.
In its latest forecast, over the five years from 2013-14 to 2017-18, the OBR has added an eye-watering £298bn to the UK cumulative net debt pile compared with what it thought might be the position three months before. That’s more than £3bn more each and every day between the autumn statement and this week’s budget. With that degree of downside uncertainty, who knows how much bigger that debt pile might be by the time Scotland decides? In domestic terms, it’s like a couple deciding to go their separate ways at the very moment when negative equity has played havoc with their household finances.
Just on these OBR figures, Scotland’s population share of that debt will turn out to be well in excess of £100bn. Eight per cent of £1.5trn (the OBR’s current net debt estimate for 2015-16) is £120bn. Such debt would have to be serviced, with or without a credit rating as a brand new state, almost certainly on more expensive terms than even a downgraded UK can command. And that burden is before another messy question, the fate of Scotland’s two biggest banks and our collective stake, as taxpayers, in their current part-nationalised state, is thrashed out.
And on an ongoing basis, as successive GERS analyses have made clear, even with independence there will be an ongoing shortfall between what government spends in Scotland and what it raises in taxes, even with control of the lion’s share of volatile North Sea revenues. The IFS has also pointed out that, for the UK as a whole, what sweeteners there were in George Osborne’s budget package, could come at painful price in further spending cuts and even tax rises post-2015.
The big tax changes – the acceleration of the £10,000 threshold for paying income tax, another increase in fuel duty cancelled, and the rate of corporation tax cut to 20 per cent by 2015 – mean the Chancellor will have lost revenues worth £24bn a year by 2016-17. And there will be nearly £5bn of additional spending on infrastructure, child care support and care of the elderly down south. In the absence of sudden explosion of economic growth by then, other areas of public spending face an even deeper axe or other taxes will have to rise.
Even a Scottish government with a Yes vote in its pocket, negotiating an independence settlement, would not be immune from those post-2015 realities. Especially one that seeks to retain sterling as its currency and negotiate a formal monetary union with the rest of the UK. The monetary policy it wants to subscribe to will have moved on of course, with George Osborne rewriting the remit of the monetary policy committee and the arrival, in July, of a new governor at the Bank of England.
But the awkward truth is there will be no deal on a formal sterling monetary union unless an independent Scotland agrees to a binding fiscal pact with the rest of the UK too, one that will inevitably constrain its freedom to pull those fabled levers of economic power as it sees fit. Scotland isn’t Cyprus in the same sense that the UK was never Greece.
But the convulsions that continue to test the eurozone close to destruction, will still loom large, whatever their outcome, as Scotland moves towards its date with its own constitutional destiny.