The coming fiscal punchup between Scotland and the UK Treasury

The SNP victory is obviously seismic, and blows all the other election news away today. The economics of possible independence or even much stronger fiscal autonomy are fascinating. In short, we might be seeing Scottish bonds, coming to a bond market near you soon.

Two names you should become acquainted with: Calman and Barnett.

The Calman Commission was set up by the non-nationalist parties in Scotland to come up with a third way on Scottish devolution. The SNP did not take part in this and instead had a “National Conversation” on independence. Essentially there are shades of grey between the current constitutional settlement and full independence. There are staging posts such as “fiscal autonomy”.

Basically it’s about Scotland having the power to borrow itself, a key characteristic of sovereign nations.

So the current plan going through the Treasury is that Scotland would be able to borrow £2.7bn as a floor. A £500m short term borrowing facility, and a cumulative £2.2bn facility to borrow to invest in infrastructure etc. The plan would see that money borrowed from an arm of the UK Debt Management Office such as the National Loan Fund. However, a recent report from a Holyrood committee suggested that the Scottish Government should have the power to issue its own bonds. That is currently being considered by the Treasury.

The other area of fiscal autonomy to watch for is the Corporation Tax rate. Alex Salmond just mentioned it in his victory press conference. George Osborne recently ordered a consultation into whether Northern Ireland should have a lower corporation tax. About a decade ago the SNP started to make a free market Celtic tiger style argument behind lower Corporation taxes. Such a policy was necessary, it argued, to help resist the magnetic economic pull of London, imbalancing the UK economy. There is some merit in this argument (though what about Stoke, Bradford, Sunderland?). In Spain, the Basque country enjoys a 32.5% Corporation tax rate versus 35% for the rest of Spain. However, my senior Treasury source suggested that there was almost no chance that Westminister would concede this power to Holyrood.

Read more: SNP wins majority in Scottish elections

Actually I heard a rather robust denial from a senior UK Cabinet minister that the election result in Scotland might change at all the negotiation on the devolution of further tax and borrowing powers to Holyrood. The SNP clearly believes it has a mandate for much stronger powers. I can’t see the Coalition giving much ground. It seems more interested in consulting Wales over new powers after its own Holtham Commission. So expect a fight. Indeed the SNP might choose to make a symbolic fight for independence on the back of such fiscal powers being denied.

And then there is the economics of actual independence. Totally fascinating. The SNP has thought about splitting the Bank of England’s gold reserves, a negotiation over what proportion of the national debt is Scotland’s, the all-important “median line” that might give most of the $1 trillion of oil remaining under the North Sea to Scotland. And what of the Scottish pound note?

“Scotland would continue to operate within sterling system until a decision to join the Euro by the people,” it said in the 2009 White paper on independence. Read for yourself here: http://bit.ly/7zvcsC

So we’re still long way off this now, but it’s clear that there will be a referendum on Scottish independence. The SNP always said it could make the numbers in Scotland work only when an unpopular Conservative government ruled in London. At the very least it suggests a difficult negotiation between the UK Coalition and the Scottish Majority governments.