This paper explores the historical precedents covering how debts and assets are split when states dissolve or become independent and applies those models to the case of Scottish independence.
In particular, the paper rejects the 2014 independence campaign's "subtractive" approach whereby Scotland adopts a "share" of the UK's liabilities less the value of an assets withheld by the remaining UK in favour of a "zero option" approach whereby the rUK is allowed to maintain its claim as the continuing state to the former UK and to adopt all mobile assets and liabilities. In such a case, Scotland may choose to "mortgage" the value of a proportion of UK debt against any mobile assets it successfully negotiates from the UK.
One of the key issues of the 2014 independence referendum was the discussion of division of assets and liabilities should Scotland and the rest of the UK become independent countries. Unfortunately, it was an issue that was discussed in shallow terms despite many historical precedents from which to draw.
The 2014 discussion simply assumed that Scotland would be assigned a population share of the UK's debt in return for a population share of assets from the UK (and that if the latter was refused by rUK, then the former would be refused by Scotland).
This paper seeks to re-open this discussion, taking as its starting point the historical precedents, as they shall show that not only is this simple model one which has rarely been used in practice, it is not necessarily one which would work to Scotland's benefit.
― This paper seeks to re-open this discussion, taking as its starting point the historical precedents, as they shall show that not only is this simple model one which has rarely been used in practice, it is not necessarily one which would work to Scotland's benefit.
― The manner in which states separate is crucial for determining asset division. In particular, the rUK's likely desire to maintain “successor” or “continuing” status to the former UK will likely be largely determined by its willingness to guarantee the debts of the former state.
― The assumption that the baseline for division should be on population can and should be challenged. Many state separations have negotiated settlements which place weight on territoriality as well as the historical contributions and beneficiaries of the former unions.
― It may be that Scotland has been a historical net contributor to the UK thus may have already more than paid its “share” of the national debt.
― The previous independence campaign discussed the possibility of a subtractive model of asset separation whereby the value of any assets withheld from Scotland by rUK (for example, currency and foreign reserves) would be subtracted from debt liabilities accepted. This report recommends instead an additive model whereby Scotland begins with the assumption of accepting no debt but will accept debt up to the value of assets transferred. It may be that Scotland actually requires less from this transfer than the subtractive model would suggest.
― For the additive model to be actionable, an up-to-date register of assets will be essential. With the last UK Government register of assets in 2007, the Scottish Government must press the UK Government to commission a new register or conduct a Scottish audit in the near future.
― Additionally, the prospect of Scotland issuing its own bonds and buying what is required is explored (‘the zero option’). This model may have significant advantages with regard to being able to denote the debt in Scotland's own independent currency thus maintaining full control over debt management and significantly reducing the chances of a default.
― The precedents and models outlined would likely all accrue varying levels of financial benefit to Scotland if utilised properly. A lack of up to date data makes precise figures impossible, but a conservative illustration of each model in the Scottish context would suggest a £800m per year financial gain from the subtractive model with refinancing; a £1.7 billion reduction in debt interest payments from the additive model without refinancing; a saving of over £2 billion per year from the zero option; and, in the case of historical net contribution, a possible financial contribution from rUK to Scotland.