Scotland's Decision: What if Scotland votes yes?

This week, we are highlighting the contributions of our fellows to Scotland's Decision: 16 Questions to think about for the referendum on 18 September.  Today’s topic is what happens if Scotland votes yes. The book is available as a free download.

Our experts look at three questions that arise in the event of a Yes vote:

  • Nicola McEwen - How long will the independence negotiations take and what will the main challenges be?
  • Angus Armstrong and Monique Ebell - How will assets and liabilities be divided?
  • Patrick Dunleavy - How long would it take to set up a new Scottish state and how much would it cost?

Nicola McEwen anticipates how the process of negotiating independence might look if Scotland votes Yes. There would be a number of challenges, not least the timetable for negotiations, where The Scottish Government envisages a timetable for negotiations which would enable it to declare independence on 24 March 2016. This would mean Scotland could assume its status as an independent country in advance of the Scottish elections scheduled for May 2016.”

She notes that: “The Scottish Government’s timetable for negotiations is aspirational. It is not set in stone and cannot be imposed upon the team negotiating for the rest of the UK” and could be affected by the conduct and outcome of the May 2015 UK general election.

Throughout, “both governments will have an obligation to negotiate in good faith, but each will also be keen to get the best outcome for their respective constituents – and be seen to be striving to do so”. There may be packaged discussions in which quite different issues – e.g. currency questions and nuclear missiles – would be considered alongside each other.

She concludes:

“…it is impossible to give definitive answers to the questions concerning the process and timing of negotiation. In any negotiation, there is give and take on both sides. Not everything need be agreed before Scottish independence can be formally recognised by the UK Government and the international community. Becoming independent, and renegotiating the relationships between the nations and regions of these isles, would be an evolving process, not a one-off event. But given the inevitable uncertainty that would follow a Yes vote, the attendant risks of such uncertainty on the behaviour of citizens, businesses and investors, and the nervousness which is likely to be felt among other states at the potential repercussions of an independence vote beyond these shores, there would be enormous pressure on both governments to negotiate an agreement on the key issues as quickly and as cleanly as possible.”

Angus Armstrong and Monique Ebell’s main focus is on the division of public sector debt in the event of a Yes vote. Three key questions would need to be clarified: what measure of existing UK debt to use; how it would be divided; and how an independent Scotland would assume its share.

Though there are other, arguably better measures, the UK and Scottish Governments use Public Sector Net Debt (PSND). Armstrong and Ebell note that the UK Office of Budgetary Responsibility forecasts PSND “will reach £1,439 billion at the end of the fiscal year 2015/16, the date at which independence would occur.”

They note that once there is an agreement on which measurement to use for UK debt, that debt could be divided by population or other approaches. The choice of approach could increase or decrease the level of debt of an independent Scotland. “On a population basis, an independent Scotland would be responsible for 8.4% of the outstanding debt. On the narrower PSND measure an independent Scotland’s debt would be £121 billion, or 73% of GDP. The latter ratio is included in the UK Treasury and Scottish Government reports.”

They also note that once a particular division of debt had been agreed, an independent Scotland’s share could assumed in different ways: “The first option is where Scotland pays the full amount of its share at independence, which we call a ‘clean break’ option … The second option, noted in the Scottish Government’s White Paper, is that an independent Scottish Government would commit to paying its share of interest and principal payments as and when they fall due. We call this the ‘IOU’ option.”

Using a population share of PSND they calculate “the total amount of debt to be raised in the first year of independence would be only £16 billion”. For them “a critical question is the cost at which an independent Scotland could borrow this amount.”

Their answer on cost:

“We have estimated that an independent Scottish Government would be likely to pay between 0.72% and 1.65% higher interest rates than would be the case for the UK for borrowing over ten years.” Moreover: “Higher government borrowing costs would also be likely to lead to higher borrowing costs for households and businesses in an independent Scotland compared to the UK. However, the increase might not be as much.”

Patrick Dunleavy looks at the challenges of establishing the institutions of a new state, and their cost. New institutions would include a Scottish Defence Force, a Scottish Security and Intelligence Agency, a Foreign Ministry, a Passport Office and expanded Scottish Government directorates for Finance and Economy and for Welfare. In addition, other government functions in Scotland are currently handled by UK Government bodies, some 206 according to the UK Government.

However “there is a considerable scope for ‘streamlining’ what gets done north of the border, compared to UK practice. In fact, we think that rather than 206 bodies Scotland would need no more than 136 bodies, of which less than 60 would be new and of any significant size at all.”

In a number of areas, including defence, HMRC and the administration of welfare benefits, an independent Scotland would look to share services with the rest of the UK for a transition period.

How much would establishing independence cost? Dunleavy identifies several different types of cost, among them set-up costs:

Set-up costs are those incurred by Scotland only, in the early transition period (especially from a Yes vote to March 2016) in duplicating a capacity that already exists in the UK. These costs are unavoidable, one-off costs of transition that create no additional or offsetting welfare gain for Scotland’s citizens. We have estimated the set-up costs for Scottish Government as being in the range from £150 million to £200 million – that is £30 to £40 per person.”

Another important type of cost are investment costs which will “have to be borne by Scotland in order for its policy makers to gain full control over the tax, benefits and defence areas, running all the back-office systems in a self-sufficient way.”

The UK Government has said such costs for the administration of welfare benefits would, over time, be £400 million and for HMRC functions £500 million. Dunleavy notes:

“These estimates are not based on any careful analysis, but given prevailing IT and change costs they do not seem implausible. However, these are not just ‘set-up costs,’ because Scotland would be replacing older and complex legacy IT systems in each case, with newer, modern IT systems that would last for a long time (at least ten years), and could well be cheaper and far more flexible to operate.”

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Charlie Jeffery's picture
post by Charlie Jeffery
University of Edinburgh
6th August 2014
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