Ultra-loose Bank of England policy and bond yields at record lows have capped the debt’s risk while Britain already has a solid reputation on financial markets. The Bank has calmed gilt markets by snapping up hundreds of billions of pounds of UK government bonds. Scotland’s public finances would be on rockier ground, however.
In 2018-19, Scotland’s notional deficit was at £13bn, or 7pc of GDP, and rises to almost 9pc without North Sea oil revenue, the annual Government Expenditure and Revenue Scotland report revealed.
If independent, that deficit, which economists believe would be unsustainable, would be higher than any other developed economy in normal times.
Flagship SNP policies from free tuition fees to free personal care for older people have made independence more alluring for voters but has damaged their fiscal credibility by keeping the notional budget shortfall high. The extra spending has been financed by the rest of the UK.
Armstrong says: “An independent Scotland would start with bigger deficits than the rest of the UK, the same debt burden and you want to use someone else’s currency? Do you really think that is credible?
“Scotland can certainly be an independent country but in order to do that it needs to convince people it can run its fiscal accounts prudently.”
The SNP established a Sustainable Growth Commission following the referendum defeat to investigate how to boost growth and improve the public finances but moving the economy into a higher gear and winning market credibility is easier said than done.
It suggested using the pound for a period before moving to another currency. However, that would mean losing control of monetary policy and Scotland would be without the interest rate calming effects of the Bank’s quantitative easing programme.
An independent country would need to “set out a very clear plan of how they would manage the public finances” given the higher debt burden and larger deficit, says Prof Graeme Roy, director of the Fraser of Allander Institute and former head of the First Minister’s Policy Unit.
He says spending cuts, tax changes or ways to grow the Scottish economy would have to be considered.
“It has higher public expenditure than the rest of the UK and in the past that gap was made up by oil but if oil revenue is not there, there is nothing to make up that gap so that’s why the deficit is so much bigger,” says Roy.
At the referendum in 2014, Brent crude was trading at around $100 per barrel but prices then collapsed. Government revenue from North Sea oil has plunged from almost £11bn in 2011-12 to £1.2bn in 2018-19.