What UK debts are Scotland's?

Referendum guide

This morning's statement from the Treasury that the UK will stand behind all its sovereign debts, whether or not Scotland's people vote for independence, is in a way a statement of the bleedin' obvious.

That debt, all £1.4 trillion of it, is an obligation of the National Loans Fund.

And nothing can change that - whether Scotland were to decide to secede (or, to pick an unlikely corollary, in the event that the People's Liberation Army of West Sussex, miffed about fracking, were to declare UDI).

So why has the Treasury chosen to say that the UK will honour its debts, whatever Scotland does?

Well, it is because investors - whom we may think of as sophisticated and informed (ahem) - have been increasingly asking the Treasury and the Debt Management Office for clarification of the status of the UK's financial obligations in the event of a fracturing of the United Kingdom.


For example officials have been asked whether UK government bonds, or gilts, would be split into Scottish bonds and Rest of UK bonds.

And what would be the coupon or interest rate on these two new classes of bonds, were that to happen?

No kind of restructuring of the debt, of that sort or any other, is going to happen, the Treasury has now made explicit.

It felt it had to do so because it feared that at some juncture the uncertainty could increase the perceived risk of lending to the UK government - and that could in turn increase the cost for the government of borrowing.

Better therefore to be blunt and clear, that the full £1.4tn would stay as a liability of England, Wales and Northern Ireland - and that there would be no legal requirement on Scottish people to pay any of it.

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Bankers tell me that markets would probably force Scotland to pay up to 1.5 percentage points more to borrow, initially at least, than the UK currently pays”

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UK government bonds and Treasury bills (short-term debt) would not be split or changed in any way. They would remain as the debts of all us.

That's a bit nice for the Scots, you might think.

Who would not vote for independence if an autonomous, separate Scotland would be set free from the burden of UK debts currently equivalent to 76% of GDP or national income (on the latest estimates by the Office for Budget Responsibility)?

Except that even Alex Salmond and the Scot Nats don't believe that an independent Scotland could, in practice, walk away from its fair share of the UK's debts - even if they would have the legal ability to do so.

Why would it be rational for a Scottish government to take on some of those debts?


Well because Salmond also wants to negotiate ownership of certain assets (North Sea oil springs to mind). And he wants an agreement on being part of a formal sterling zone, in which Scotland would retain the pound and have some kind of influence over the Bank England's approach to monetary policy.

Perhaps even more importantly, if Scotland were seen to be repudiating all UK debts, investors might be very reluctant to lend even a brass farthing to it as an independent state.

Which is why the Scottish government's White Paper on all this makes it absolutely clear that an independent Scotland would be liable for some of the current national debt.

In the event of independence, Salmond would negotiate for Scotland to service - pay the interest and principal - of a certain portion of the UK's debts.


Or to put it another way, Scotland would become a debtor of the rest of the UK, or of the Treasury in London.

And when you put it that way, you can perhaps see why any eventual talks on this would be pretty fraught and difficult.

The following issues would have to be resolved:

1) What share of the debt could fairly be ascribed to Scotland?

2) What interest rate should Scotland pay to the Treasury?

3) Over what time period would the Scottish government be required to repay all its debts to the rest of the UK?

Taking the last first, the time period to repay all the debt, presumably that should mirror the debt profile of UK's current debts - which has an average maturity of 14.5 years.

For the first issue, Salmond's White Paper argues that the share of debts assumed by Scotland could be calculated by reference to the population or the net central government money (fiscal transfers) received by Scotland since 1980.


On both these measures, Scottish debt as a percentage of national income would be below that for the rest of the UK.

But even if that argument were to fly with the Treasury, the chancellor could argue that Scotland should pay a higher interest rate than that paid by the British government - because Scotland, as a smaller economy with no fiscal track record, would be seen as a riskier borrower than the Rest of the UK.

Bankers tell me that markets would probably force Scotland to pay up to 1.5 percentage points more to borrow, initially at least, than the UK currently pays.

A British Chancellor could therefore argue, perhaps, that Scotland should pay that market rate to him too.

And, by the way, this issue - of what investors would charge Scotland for funds - is likely to be a pretty hot one in the referendum campaigns, since it will have a material impact on the country's prosperity in general (the interest rate paid by a government is the benchmark for the rate paid by all borrowers in a country) and Scotland's ability to fund public services in particular.

Robert Peston Article written by Robert Peston Robert Peston Economics editor

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  • rate this

    Comment number 516.

    I agree that in the event of a YES vote that things should stay as they are until the GE in 2020.

    Scotland should get the same EU in/out vote as the rUK but the votes should be counted separately.

    The Scots should be made aware that unless they have their own sovereign currency and stay out of the EU then they will have the rUK pound followed by the Euro and will never be truly independent.

  • rate this

    Comment number 515.

    I love the English!
    Can I get one for next Christmas ?
    One without a tail. Please

  • rate this

    Comment number 514.

    God bless Scotland and love the English also!

  • rate this

    Comment number 513.

    Craig, rUK - will not need to re-negotiate anything, it will still be the same nation state. Geographicaly smaller, but the same state. You also said that the Edinburgh Agreement made it clear the UK had to approach the EU - it does not. "work together constructively" is very very far from the UK having a) the requirement or b) the authority to negotiate anything.

  • rate this

    Comment number 512.

    Lets Go!

    The BBC (EBC) is guilty of seeing the UK No way of thinking!

    The BBC is behind the SNP and most of the Scots for A YES ! NA!

    Dont like the EBC (LBC) and all it stands for so!

    Divorce from London and the so called BBC is okay for me and a HELL of allot of Scots I HOPE!

  • rate this

    Comment number 511.

    John Campbell@488
    'Why go down
    a different road
    from neighbours?'
    For individuals: adventure? For society, something very wrong?
    Infant rivalry, to childhood co-operation, to adult equal partnership, arrests & perversions of development always possible - in context of non-democracy 'natural for most if not all: hypocrisy & corruption made the rule, hope inchoate attaches to flags, a vicious circle

  • rate this

    Comment number 510.


    As long as it is not English!

    Makes me sick!

  • rate this

    Comment number 509.

    Janu, grammatical error, was purely stating Edinburgh Agreement and should have followed that by the word 'then' to explain my sequence of events. I know treaties are not mentioned in it however both IScotland and rUK will have a lot of negotiating to do separately with the EU who will relish trying to weaken current treaties and rebates

  • rate this

    Comment number 508.

    Very different - thats why I said it would set precedence - and also why I think the competency to act as government of the new state should be established before independence. It may yet, the UK Govt has to respect the result of the referendum, but not the timescales (actually not one word) of the SNP white paper.

  • rate this

    Comment number 507.

    Tell London to have a debate on the 100 year war as it seems to be a black out from the BBC using our TV TAX!!!!

  • rate this

    Comment number 506.

    if you think inclusion of any part of the EU\EEA even when you're already embedded is a cake walk

    I never said it would be a cakealk merely different to anywhere else, the statements from the likes of Barrusso, which then get backtracked on later suggest they far to keen on opening their mouths & making pronouncements without reading the fine print first, a trait the SNP share

  • rate this

    Comment number 505.

    @503 - The devloved constitution can be legally removed by the UK government without any recourse to the EU or any other nation state.
    Don't get me wrong the seperate systems will make independance much easier and there will be no change required to Scotish Law for it to comply with EU Law. But only Nation states can sign the treaties and Scotland isn't one... Yet.

  • rate this

    Comment number 504.

    This is my personal take on the EU issue based on politics as much as law. Nobody in the EU wants "treaty change" as that requires mutiple referenda arround the EU, so Scotland will only be an EU member on day one if it becomes an additional signatory. This will be legally seperate to the UK exemptions, and so Scotland will lose all UK rebates and exceptions.

  • rate this

    Comment number 503.

    Scorland has completely seperate legal system which, for example, already independantly conforms to the ECHR, which is also incorporated into the Scottish devolved constitution in a way which makes it impossible for Scotland to renounce the ECHR in the way that the Tories wish to do, despite not having seperate CoE membership it already has a seperate & distinct relationship with it

  • rate this

    Comment number 502.

    Oh Sorry, I should also not have used Monaco as an example, its a seperate state not a regiona. But if you think inclusion of any part of the EU\EEA even when you're already embedded is a cake walk, check out the five years or so Norway, Lichtenstein and the EU have been going backwards and forwards on how to deal with Monaco and Andorra!

  • rate this

    Comment number 501.

    @500 - Yes and no, Scotland has no constitutional primacy - that lies with the Government of the UK, which is exactly why the Edinburgh agreement had to exist for the referendum even to take place. Scotland currently has no seperate standing in international law, is party to no international agreements. The differentiation between Scotland and England and Wales is a regional policy of the UK.

  • rate this

    Comment number 500.

    @497 - The UK was (and currently still) is a single nation state. Regional parliments are not unusual

    They don't have fundamemtally different legal systems & seperate primary instituions, the UK arrangement is quite unique. Scotland is voting on seperating from the UK but its structures were always seperate & had to conform to EU rules seperately,

  • rate this

    Comment number 499.

    @497 - The UK was (and currently still) is a single nation state. Regional parliments are not unusual, German states have their own parliments, regional laws, taxes etc likewise Catalunya, Monaco and others. Scotland is voting on becoming a new independent Nation State - This has never happend within the EU/NATO - negotiations have always happened after the new state is Constituted.

  • rate this

    Comment number 498.

    The reason I beleive there must be an election between the referendum result and the official date of independence is so that there can be no legal uncertainty over who will be in government on day1, and therefore their mandate to negotiate and sign the agreements. It is totally conceivable that there is a Yes vote and Labour win the 2016 election with a different constitutional view to the SNP

  • rate this

    Comment number 497.

    How much of an EU precedent is set is debatable given the UK was unusual in that it joined as a union of countries with different legal systems + different education system & police & other independent national institutions + a seperate Govt after devolution all of which had to independantly conform to EU rules. nearest comparable is probably Denmark which is already sorted.


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