The UK Will Pay Its Debts - What Else Could It Do?

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The independence stushie de jour is all about the UK government's announcement that the Treasury would honour all debts it has incurred by the time of a putative Scottish departure from the Union or, as that rabidly pro-Scotland rag the The Telegraph would have it "Salmond's delight as UK promises to pay Scotland's debts".

 

danny alexander fright   Alex-Salmond delight

 

What else could the government do? If they had decided to announce that they would not guarantee any debt incurred on behalf of Scotland it would have been impossible to fund any capital expenditure to which they are obliged by virtue of the Barnett formula - that would have played directly into the SNP's hands because we can be sure that suddenly a large number of high-profile public infrastructure projects would noisily stop. 

But let's not get carried away with the notion that Danny Alexander's munificence is unilaterally funding all of Alec Salmond's fondest dreams, despite what many of the Telegraph's commenters seem to think. Although he may just have confirmed one of Mr Salmond's desires...

 

Really all that has happened is that the UK Treasury has said that it will honour the UK Treasury's debts. In other words, the status will continue to remain quo. In the event of Scottish independence, the apportionment of that debt will form one of the major planks of the dissolution negotiations. Scotland will then reimburse the UK for the outstanding amount.

The UK will not have any liability for any Scottish borrowing after independence, nor would it be expected to. Between a Yes vote in the referendum and full independence there will have to be transitional arrangements and a probable reluctance to extend government borrowing in any direction.    

It is to be hoped that a new Scottish government would display one of the national characteristics that we all like to paint ourselves with - thrift. Government debt is no such thing - it is debt laid upon the people, and in which they will have had little or no say. Hard-working people, scraping by and putting a little away in savings whenever they can could find their life's effort squandered by a bunch of profligate politicians spraying cash round like sailors on shore leave after seven months at sea. And if you think that can't happen just remember the last Labour government as they rushed to save their friends in the banks.

No, it is to be hoped that the new Scotland may be able to manage without any borrowing at all. Like many of my readers I was brought up with the attitude that "if you can't afford it, you can't have it". Why should any government have to borrow at all? I don't want ours to, I want them to live within our means.

But this announcement has strengthened Alec Salmond's hand over the dispute about continued use of Sterling after independence. Let's set aside the fact that there is nothing that anyone could do to stop Scotland using whatever currency it wanted. What would Mr Osborne do - confiscate all the notes and coins in circulation north of the border? One thing that is certain is that he will want to be paid in pounds and this will be easiest when we have large amounts of them circulating in our economy.

And there is a residual benefit to Scotland in continuing to use the pound; the same benefit that Germany has experienced since the introduction of the euro. It is likely that the Scottish economy will grow faster than the rump UK, as long as the pollies can keep their hands to themselves and let our natural inventiveness express itself. Remember that in the (formerly top secret) McCrone report from 1974 the UK government was told that in the event of independence any Scottish currency would appreciate quickly against Sterling and a trade surplus that would "embarrass Switzerland" would ensue. Retaining a low-performing pound would artificially depress the costs of our own exports and make them better value in world markets, thereby kick-starting the new Scottish economy. 

Once we have a robust indigenous economy and have paid back the UK's residual debt, then we can consider establishing our own currency. But not before.

 

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