Debt and Deficit
When in any single year, a government spends more than it raises in revenues (taxes etc) it is in deficit. To cover the gap, the government has to borrow money (assuming it does not have any reserves). That borrowed money is the government’s debt, and it will have to pay interest on it to the banks / financial institutions who lent the money.
With each year that the government is in deficit and has to borrow more money, the debt will grow, and so will the interest payments on it.
When a government takes more money in than it spends in a year, it is in surplus and can repay some of its debt. The theory behind cyclical deficit is that when times are bad a government runs a deficit and borrows to cover the gap, allowing it to continue paying for its spending committments. Then, during good times when it is recording a surplus, it will pay back the debt it borrowed.
A structural deficit is altogether nastier. This means that even when the economy is operating at maximum potential and tax revenues are high, the government is still spending more than it takes in, and so still accumulating debt. George Osborne originally promised to eliminate the UK’s structural deficit by 2014-15, but has had to revise his forecast to 2017-18
Debt and Deficit in the UK
In March 2014, the UK government’s net debt was£1.24 trillion pounds. This is forecast to rise to £1.57 trillion by 2017-18.
The deficit for the year to March 2014 was estimated at £107.8 billion pounds. George Osborne expects this to fall each year until 2017-8, at which point he forecasts a surplus of £5billion.
Debt Interest payments
In 2014 alone, the money UK taxpayers will pay in interest to those who have lent to the UK will be £47.9 billon.
This is forecast to rise to £67.9 billion by 2018.
£47.9 billion could pay for about 30 new hospitals, such as the 2010 Royal Derby.
Scotland’s share of the UK’s debt interest repayment, on a population basis, was calculated as being £4.02 billion in 2012/13.
Imagine a line of of 186,593 newly qualified Scottish primary teachers in Scotland a metre apart, stretching almost from Edinburgh to Inverness, handing over all their salary each year to the UK treasury. That’s how much Scotland is paying.
A debt we never needed
The UK debt had been reducing since a high point following World War II, but this progress slowed and it started to build up again from the late 70s. In 1976 the UK faced a Sterling crisis during which the value of the pound tumbled and the UK found itself with insufficient funds to maintain its spending commitments. Scotland’s stronger economy on a per head basis and the growth of oil revenues (particularly in the 80s) meant that the UK’s growing debt was not generated by the Scottish economy. If Scotland’s finances had been managed as if it had been an independent country from 1980 onwards this £4.1 billion burden would not exist.
As this chart shows, Scotland ran a significant surplus throughout the 1980s.
If Scotland had been an independent country for the past 33 years, its higher revenues would have meant that we would not have had to borrow a single penny. In fact Scotland would by now have a cash surplus of at least £50bn. Scotland has been paying billions of interest on loans Scotland didn’t need. This enormous subsidy from Scotland adds up to nearly £72 thousand million pounds to date, and is growing at £127 per second.
The level of Scotland’s share of the UK debt following independence will depend on the negotiated division of the UK’s assets. The Scottish Government’s suggestion in accordance with the guiding international conventions is that if Scotland accepts population share of the debts then it must inherit a population share of the assets.
As the Financial Times reported An independent Scotland could also expect to start with healthier state finances than the rest of the UK.
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Category: Economics of Independence