WE concluded the first part of this analysis yesterday by looking ahead to the question as to whether Scotland has actually generated this debt, a question that comes down to oil.

Given the phenomenal contribution North Sea oil made to the UK as a whole, which it can reasonably be argued was squandered outside Scotland, does Scotland have any liability for the debt, come what may?

I am aware that Business for Scotland argues very strongly that it does not. It argues Scotland is owed money.

I am equally aware that Channel 4’s Factcheck found the case hard to call, albeit it could not find a case for money being owed for the oil years (let’s call them 1980 to 2014).

I do, however, think that Channel 4 ignored something Business for Scotland did not when undertaking their estimate. This is that if there was no deficit in that period, Scotland should not have been charged any part of the interest paid to service that deficit in that period. What is, however, very clear is that such interest costs were apportioned to Scotland in GERS, the already doubtfully calculated and dubiously named Government Expenditure and Revenue Statement for Scotland. Business for Scotland suggests that £126 billion of interest has been charged to Scotland through that statement. I share its doubt that very much of that should have been included in the account when it did not arise in Scotland.

However, if Channel 4 is right and no debt arose between 1980 and 2014, and this “no debt” approximation might be the best estimate that can be achieved for this period, then interest charges during that time cannot be eliminated again. But that still leaves the possibility that an adjustment is required. Interest has been charged to Scotland since 2014. The UK as a whole had an interest charge from April 2014 to March 2020 of about £260bn (based on HM Treasury budget estimates). Of this sum approximately 8%, or £21bn, will have been allocated to Scotland through GERS. That, however, is inappropriate. If there was net debt of no more than £98bn that could have even been used as a basis of apportionment to Scotland up to 2014, then the interest charges made to Scotland since 2014 are based on a cumulative debt that Scotland could simply not have owed. I have not worked through a detailed calculation of how much of the debt charge from 2014 onwards should have been cancelled as a result, but I suggest that it is likely that 75% of it should be eliminated from any apportionment to Scotland when this is taken into account, ie any debt apportionment for 2014 onwards should be reduced by about £15bn for this reason.

Let’s pull this together then. Using House of Commons Library data, and not allowing for inflation (and it’s arguable whether that is relevant, but overall I suggest not as most of UK debt is not index-linked) then UK debt in 1980 was £98bn. In 2014 it was £1,442bn. I argue the latter figure does not need Quantitative Easing (QE) adjustment since that QE adjustment still exists, and the debt and QE are independent factors. The amount of gross debt that falls out of consideration in that case is £1,344bn. The net debt to take out of consideration is then the gross current debt of £1,806bn less the debt to which Scotland could not have contributed of £1,344bn, leaving debt of £462bn for apportionment at most, from which the £506bn QE adjustment previously noted must be deducted, leaving a gross apportionable sum for Scotland of £44bn being owed to it. This means that on a pure population-apportioned basis (which I am using solely for example, and not because it is necessarily appropriate) a net sum of just under £4bn is owed to Scotland, to which the interest charge adjustment already noted should be added, leaving Scotland being owed maybe £19bn in all.

The next question is when might any repayment be due.

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I WOULD also suggest that this is by no means the end of the argument, either. Let me pursue this point in another quite different way. Suppose for a moment that none of these adjustments for oil were agreed. I can see no equitable reason why they should not be, but let us just suppose an impasse was reached on them. And let us suppose a crude population-weighted debt apportionment was accepted, which I would suggest no Scottish negotiator would go near as a basis of settlement, but again, let us again just suppose. And then note that the UK statement on debt issued in 2014 says: “Instead, an independent Scotland would need to raise funds in order to reimburse the continuing UK for this share.”

This is, to be very polite, nonsense. The reality is that, as the note says, legally Scotland does not owe the debt that England would have to assume on Scotland becoming independent. So, what Scotland would be making payment of to England would be a compensation payment for the cost of that debt since the UK Government has already conceded Scotland cannot legally owe this money. And when it comes to compensation payments there is a very simple legal principle that comes into play, and that is that the aggrieved party (ie, the one who is being compensated) may not profit from the compensation payment; the aim is that they simply be left no worse off than they might have been but for the compensation being due.

This is very important in this case, for two reasons. The first is that England cannot ask Scotland to repay to it a debt when it has no intention of actually repaying. As my research has found, since the Second World War, there has been total government borrowing of £1,744bn. And there have been net repayments of that borrowing of £37.6 billion, none of which have been made in the past 19 years. To put it another way, repayment of government debt was always rare, and has now ceased. And if the UK Government is not repaying debt then there is no reason why Scotland should compensate it for the cost of repaying debt it has no intention of redeeming. In other words, even if a debt was due now, nothing at all with regard to the capital sum owing would actually be repayable by Scotland. I cannot state it more bluntly than that. Even if it could be shown there was a nominal liability for a share of debt, and it is not at all clear that is the case, precisely because it is a compensation payment that is due and there is nothing to compensate England for if – as seems inevitable – it has no intention of repaying any of the capital sum due on its national debt to those to whom it is notionally owed, then Scotland has no capital debt repayment to make, at all.

The final quartion is what interest rate is owing.

THAT still leaves the issue of interest rates, though. After all, if the debt is not to be repaid what matters is the interest due on it.

Yet again, it is worth noting that England may not profit from this compensation payment from Scotland. And recall that this is not existing debt that is being discussed. It is a new obligation being created, if that were to prove to be necessary. And it is going to be long-term debt because the UK debt to which it is related is not being repaid, and nor is it likely to be. Right now, the UK is borrowing long term (30 years or more) at 0.6%. That is the maximum rate Scotland might owe then.

The arguments covered in this series lead to at least four conclusions.

The first is that Scotland does not have any obligation to compensate England any part of the so-called UK national debt as agent for the rest of the UK because no part of that debt can at present be attributed to Scotland.

The second conclusion is that even if Scotland did have a notional liability owing to the rest of the UK, the capital balance on the loan would not need repayment because there is no indication that the remaining UK will be repaying any of its debt, and therefore there is no reason for Scotland to make payment to the rest of the UK for something that they will not be doing.

Thirdly, even if debt was due right now it would be the case that around £19bn was due to Scotland.

And fourth, if interest is due it would be at a maximum of 0.6% per annum.

Pulling these conclusions together does, however, leads to the necessary statement to be made that 0.6% of near enough nothing (in these terms) is not a lot. In that case this rate is slightly academic. But even if it was (quite absurdly) agreed that Scotland owed the maximum possible liability of £106bn, the interest due would be just over £600 million a year. This is not insignificant, but then, it is not due either. But if it was, this sum has to be kept in proportion. This sum would be less than 1% of a likely total Scottish Government budget and this is an exceptionally low-interest cost, not least compared to the UK over recent years where in percentage terms it has been very much more than that. However looked at then, this is not going to make or break an independent Scotland. And that means that debt is not in that case going to be a big deal in the independence debate, however it is looked at.

And I make one final point. Anything owing would be negotiated. Nothing relates to existing debt. So Scotland would be at complete liberty to demand that any favour it grants (for favour it would be) would have to be payable in Scottish pounds. Nothing else would do, and nothing else would be acceptable.

Scotland would not want to start its independent existence owing debt in a foreign currency, and must not do so.