A man walks past a pro-independence poster by the seaside in Aberdeen, northern Scotland on Monday. The referendum on Scottish independence will take place on Thursday when Scotland will vote whether or not to end the 307-year-old union with the rest of the United Kingdom. Reuters
The division of assets and liabilities after a breakup is rarely easy.
But it is this split that will shape Scotland's future in the event of a vote for independence later this week. There are few simple answers. Even the superficially attractive idea for Scotland of walking away from the U.K.'s liabilities comes at a potentially high cost.
Scottish pro-independence politicians have said they envisage taking on a share of U.K. liabilities in exchange for an equitable share of U.K. public-sector assets. But the latter, from Scotland's point of view, includes sterling and a currency union; something that is opposed by all three main political parties in the U.K.
But this division will determine the kind of tax and spending choices an independent Scotland would be able to make. Based on a per capita split, Scotland would take on 8.3% of the U.K.'s debt—implying Scottish gross debt to GDP of 90%, Moody's notes. Another scenario is that Scotland would take on a "historic share" of debt, recognizing past strong fiscal contributions to the U.K. Treasury from Scotland. That would imply a much lower debt ratio—perhaps 45% of GDP, according to Moody's—but would likely be a tough deal to get politically. Both of these outcomes assume, however, that Scotland gets a deal on the currency that proves palatable.
That can't be taken for granted. Any currency union acceptable to the rest of the U.K. would likely involve Scotland ceding back a significant chunk of the independence it has just won, including crucially the ability to set its own fiscal policy. Conversely, a currency union that provides Scotland with fiscal flexibility will almost certainly prove unpalatable to the rest of the U.K.
Pro-independence politicians have said that if the division of assets isn't equitable, in their eyes, then Scotland could refuse to take on its share of the debt. Starting with a clean slate might sound attractive. But it would be a consequence of having to adopt a plan B on currency—already an inferior starting point. It would likely hurt an independent Scotland's credit rating, raising questions over its willingness to pay its obligations and pushing up its borrowing costs.
Moreover, this debt-free solution might be a mirage. Even if Scotland were to emerge with no inherited U.K. debt, it would quickly need to borrow in large amounts to fund its own institutions. Debt would be a minimum of 41% of GDP if Scotland adopted sterling unilaterally and 58% of GDP for a currency peg, UBS estimates, and would likely rise from there. The experience of other countries piggy-backing on another nation's currency suggests Scotland would have to run a tight fiscal policy in any case.
The eurozone, after barely a decade of existence, ultimately saw a breakup as bearing massive costs. Even in that short time, the financial ramifications had become enormous. After 307 years of union, the Scottish case looks even more difficult to unravel.
Write to Richard Barley at richard.barley@wsj.com