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Scottish Debt Mountain is a Molehill

Scottish 'Debt Mountain' is a Molehill

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By @johnweeks41

John Weeks is a member of Economists for Rational Economic Policies.

I was raised to believe in the stereotyped Scot who is tight with her/his money and Scots collectively as the nationality least like to leave a big tip at a restaurant.  How wrong I was – in a major journalistic scoop that beat the Daily Telegraph to the profligate-government punch, The Guardian revealed on 15 December that Scots, or at least their government, spends like drunken sailors.

To quote from the UK’s left of centre daily:

"Public sector debt in Scotland has mushroomed to record levels after an SNP government spending spree funded by billions of pounds’ worth of borrowing from pension funds, international banks and the Treasury.

An investigation by the Guardian has found that total borrowing to build schools, roads, railway stations, colleges and hospitals under the devolved government could reach £50bn by the end of the decade, putting a heavy strain on the public finances."

Now, there’s a shocker, borrowing to build schools, railway stations, colleges and [worst of all] hospitals!  In addition to being in a “spending spree”, it is obvious that the government in Holyrood is obsessed with educating a healthy population and making the trains run (perhaps even on time).

Well before the shocking exposure by The Guardian, the Scottish Deputy First Minister John Swinney publicly confessed to engaging in a “spending spree” for investment:

The Scottish Government has consistently advocated an alternative approach [to Osborne’s austerity], that would ensure the deficit is reduced whilst also allowing for significant additional investment in public services compared to the Chancellor’s plans.

If I read The Guardian’s bit of bold investigative journalism correctly, the £50 billion refers to accumulated borrowing now through 2019.  Calculating the height of the debt “mountain” is not straight-forward, however.  Comparing this borrowing spree to Scottish public expenditure provides a useful start.  If the £50 billion refers to 2015-2019, it implies annual borrowing of £12.5 billion. 

For the 12 months ending June 2015 Scottish GDP was £143 billion, which makes the annual investment borrowing 8.7% of GDP for the current year and about 8% should Scottish GDP grow at a modest 2% per year between now and 2020.  Whether that borrowing ratio is a “spending spree” depends on one’s view of the wisdom of investing in health, education and transport infrastructure and the cost of servicing the debt. 

It is the obvious opinion of The Guardian writers (and perhaps the editors) that borrowing in itself constitutes reckless behaviour.  Before dealing with that Teutonic fiscal philosophy (the German word schuld means both debt and guilt), another ratio is relevant, public debt to GDP.  If the Scottish government had no other debts, £50 billion would leave it with one of lowest public debt to GDP ratios in Europe, barely over 30% by 2020.

However, the Scottish government has other debts, though not of its making.  The UK public debt is by definition the debt obligations derivative from Parliamentary action.  The UK government allocates this debt among the constituent parts of the United Kingdom on the basis of population.  At the end of June 2015 – to match the timing of latest measure of Scottish GDP – UK public debt was £1513 billion

The Office for National Statistics reports Scotland to have 8.4% of the UK population, implying a “Scottish debt share” of £127 billion.  For the United Kingdom as a whole public debt represented 81% of GDP, and 89% for Scotland because of its lower per capital income.

The practical meaning of this £127 billion is far from clear.  The government that sits in Holyrood legally incurred none of the debt, nor does it have any legal obligation to service that debt.  As should be obvious, the obligation of Scottish population to honour the UK public debt results from being UK citizens, and that obligation is fulfilled through taxes paid to HMRC.

This apparent diversion brings us back to The Guardian and its vision of a Scottish spending spree.  As long as Scotland remains part of the United Kingdom with current fiscal rules, the Holyrood Parliament has responsibility to service only the borrowing it does, £50 billion by 2020 according to The Guardian. That will represent barely 30% of regional GDP in 2020.  This debt-GDP ratio would be the envy of almost every government of the euro zone (Finland, Luxembourg and Slovenia the only exceptions).

If Scotland were to declare independence, the allocation of the UK public debt would become an issue for negotiation.  It is very unlikely that the current Scottish government would accept 8.4% of that debt, given the clear opposition of the region’s voters to the fiscal policies of London-based governments over the last five years.  At the very least Nicola Sturgeon would argue that George Osborne’s policies have severely delayed the recovery of the UK economy, generating a borrowing level far greater than if he had implemented more rational policies (not to mention spending on Trident).

To be fair, The Guardian did have a scoop, but reported it with the wrong empahsis.  The headline should have read, “Holyrood Government rejects Austerity and Invests in Scotland’s Future”.


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