Scotland’s Finance Secretary, John Swinney, committed today, 16th June, to borrowing literally untold extra billions in the first three years of a putative independent Scotland’s existence. Over that period, he would triple the rate of public spending planned by the whole of the continuing United Kingdom.
It is known from advance budgetary figures that in the third of these years, 2018-19, the extra borrowing requirement will be £2.4 billion. What Mr Swinney plans to borrow additionally in 2016-17 and in 2017-18 is not being disclosed, nor is the planned target for the spending, if indeed that is known.
However, he has said that he will fund by extra borrowing a spend at three times the rate planned by the UK Chancellor – with a 3% spending rise, year on year, over the period 2016-2019, where Osborne plans for 1% year on year. This would see the Finance Secretary borrow £2.33 billion in 2017-18 and £2.26 billion in 2016-17. With the known £2.4 billion borrowing for 2018-19, this would add up to a total additional borrowing of just under £7 billion [£6.99bn] in the first three years of an independent Scotland.
In saying that he will spend at three times the rate Osborne plans to do in the UK, Mr Swinney has airily dismissed the Chancellor’s ‘austerity’ stance – even though Osborne’s strategy has pulled back the UK economy in a timescale against almost universal expectations. The IMF’s Christine Lagarde recently apologised publicly for the fact that their judgment on the UK’s strategy had been wrong.
Credit rating and borrowing cost issues
In making his announcement, to The Herald, Mr Swinney attempted to ease concerns about the cost to Scotland of such borrowing – borrowing voluntarily incurred at the outset of independence and before any revenue generation measures implemented to pay for it have had a chance to show if they can deliver.
Senior figures in the financial world, academic economists and independent analysts have said that an independent Scotland would have a higher interest rate to pay on its state borrowing than would the UK, since the UK has a credit rating and a long known performance history in its borrowing where Scotland alone cannot yet have either.
At the start of May 2014, the credit ratings agency, Moodys, said that it would hope to see Scotland given a good credit rating – at investment level – an A rating. It said though, that it would expect Scotland’s rating initially to be two points below that of the UK. A year ago the UK lost its Triple A rating by one point [with Moodys the first to withdraw it], sitting then, as it does today, at AA1. Moodys expect Scotland to start at AA3, making Scotland’s borrowing rates higher than those of the UK.
Moodys also pointed out that the issue of credit rating and interest rates on borrowing are together one of the key reasons why Scotland being offered a currency union with the UK under the Bank of England is not a goer. The inclusion of a newly independent Scotland would reduce the UK’s credit rating further, meaning higher interest rates across its entire borrowing and leaving everyone in the UK and Scotland worse off. The populations of the continuing UK could not accept this – and why should they?
In addition Moodys made it clear that if Scotland were to default on its share of the UK national debt or if it were to be part of a bitter and protracted set of severance negotiations with the continuing UK, either or both of these would negatively affect the initial credit rating it would be assigned – and therefore its borrowing costs.
Mr Swinney’s announced borrowing plans now put the onus on Scotland, in its own interests in avoiding crippling interest rates on that borrowing, not to prolong such negotiations. And that puts Scotland rather between a rock and a hard place.
The risk factors and the rating agencies’ perspective
To counter concerns today on the cost of his declared intention to borrow heavily in the first three years of indy, the Finance Secretary simply dismissed the opinion of the spectrum of experts in the field.
He said that his performance in managing the Scottish budget had demonstrated an ability to see Scotland live within its means; and that this track record had been obtained during the tough financial times from 2008 onwards.
This is all true – but it ignores what the ratings agencies will not ignore.
Managing a given budget with the imperative simply being to play safe and demonstrate competence – which Scotland has valued in the naturally prudent Swinney’s performance – is one thing.
Determining that budget and managing it across the full range of governmental ‘levers’ he keeps mentioning – and which he has had no previous experience of using and of using in concert like the orchestra they are – is a very different matter.
He would also be using these in the context of a set of pressures no political figure in the UK has experienced – in a breakaway state, a newly independent country with the umbilical cord freshly cut, a new ‘mother’ with a ‘how to’ guide, a set of borrowed feeding bottles in the fridge and a stack of IOUs to pay.
Beyond that again is another set of unaccustomed pressures he would be working under, many requiring a buccaneering risk-taking mindset which is emphatically not his own. It is, though, his political master’s preferred modus operandi, with First Minister Alex Salmond all but a professional gambler on the geegees and feeding off the adrenaline of risk.
The plan to go for bust and borrow heavily to fuel a feel good factor in the first years of a possible indy and just hope to be able to pay for it, is far more characteristic of Salmond who may well have been its true author.
It will be Mr Swinney’s responsibility, though – and in his hefty immediate borrowing plans he has clearly accepted that responsibility – to deliver the appearance of an instantly successful country in which everyone is better off, with better prospects, better services and better care from the state.
It will also be Mr Swinney’s responsibility to find ways of affording the pensions he has told his ministerial colleagues are unaffordable.
Nightmares and bad dreams
Scotland’s real nightmare, however, would be the possibility that the Finance Secretary might not even be Mr Swinney – but could be Ms Sturgeon, the Deputy First Minister who has been preparing her case for such a post. She chose to move to Infrastructure, swopping portfolios with Cabinet Secretary, Alex Neil, who went to Health to replace her.
In doing so she wrung from Mr Swinney’s unwilling grasp [their relationship is rather fraught] the ‘Investment’ aspect of his own finance portfolio, giving her a sort of qualifier for the Finance job she would of course get if she wanted it.
The ratings agencies would be deeply unimpressed by a Scotland led by the illusionist combo of Salmond and Sturgeon.
In the meantime, media queries following Mr Swinney’s announcement on intended borrowing were fielded by a ‘spokeswoman’ for the Scottish Government whose ‘voice’, from The Herald’s account, sounded very like the volatile Joan MacAlpine, a Salmond favourite but not, as far as we know, competent to speak on complex economic or financial matters.
This spokeswoman declared that even with the planned substantial extra borrowing, Scotland’s deficit would continue to fall [Nice work if you can get it.]
The spokeswoman was clearly neither an economist nor a fiscal specialist, judging by the ‘stream of consciousness’ flow of someone else’s narrative that then emerged.
She is quoted by the Herald as having said: ‘The Scottish Government has made clear that we oppose the austerity measures and believe the best way to reduce the deficit in the long term is to invest in public spending, to grow the economy and reduce the deficit in a sustainable way, ensuring there is less need to borrow in the future by boosting revenues in the long term. [Ed: If you borrow immediately and boost revenues in the long term, the deficit will not 'continue to fall' and that deficit is itself boosted by increased borrowing costs.]
‘Investing in public spending can bring real benefits to the economy and our public finance projections include a 3% increase in public spending funded by additional borrowing in order to ensure public spending keeps pace with inflation – in contrast to UK Government plans for a 1% increase which would be a real terms cut. even with a 3% increase in spending growth, Scotland’s deficit is forecast to fall to 2.2% of GDP in 2018-19, below the current level of 8.3%.’
This is wing and prayer.
