The latest YouGov poll showing the Scottish Nationalists are within six points of winning the independence referendum has sent the Treasury into chaos, as they admit they have no plans to deal with the breakup of the United Kingdom. The Treasury’s permanent secretary, Sir Nicolas Macpherson, conceded that little had been put in place when he was questioned by MPs yesterday.
He told them: “There are plans and plans. We may have made contingency plans about contingency plans, by which I mean if Scotland were to vote for independence in the early hours of the morning… we will have a team in place tasked with dealing with this.”
Whilst England is far larger than Scotland, with roughly ten times the population, the split would still have significant financial implications. The problem that has been most regularly debated is the issue of currency, with the Westminster government insisting it would never share its currency with a foreign country, even if that country is Scotland.
The Scottish government say they will not pay their share of the UK’s enormous governmental debt if they do not get a say over the currency. They propose effectively to be given joint ownership of the Bank of England in the City of London, which issues the pound. But this would mean 53m English people would have half their monetary policy dictated to them by 5.3m Scots.
Under current arrangements the pound survives because the whole country has a similar fiscal policy, but this would change after independence. Both England and Northern Ireland have a majority of Conservative MPs (although in Northern Ireland the mainstream right-wing choice is called the DUP), whereas almost all Scottish MPs are Labour.
The United Kingdom of England, Wales and Northern Ireland is likely to be much more right-wing than the present UK, whereas Scotland plans to become a high tax and spend oil-rich nation like Norway. The disparate policies would make the pound as dysfunctional as the Euro, and the threat of this has led to its value plunging on the money markets in recent days.
The Scots could adopt the currency unofficially as Kosovo has done with the Euro, and there would be nothing the UK could do. In fact, the UK would probably be perfectly happy with this as the it creates no liability on the Bank of England and leaves London free to determine policy on its own.
The elephant in the room is that the EU has so far only allowed new countries in if they adopt the Euro. So far Spain has said they would veto Scotland’s application for membership as a result of fears it may encourage Catalonia to walk away from Madrid. However, the UK is highly likely to use its economic and political muscle to force the EU to accept Scottish membership if they wanted it.
North Sea Oil will also be a major headache for the Treasury and perhaps even the foreign office. Most North Sea oil is brought to the UK via Aberdeen but there is no agreement between England and Scotland over who owns it. This is because the Scottish government use a non-standard definition of their territorial waters, which places almost all the oil with them. But the UN definition, which the English recognise, creates a much more even divide.
Scotland would be financially reliant on North Sea oil and so would be unlikely to concede anything to the English, but equally the Treasury would be keen to enforce their right to a share. It is impossible to see how this could be easily resolved.
Another area likely to cause significant disagreements is banking. In 2008 the Treasury bailed out the Royal Bank of Scotland to the tune of £37bn. It is hard to see how a country as small as Scotland could have bailed it out. This was true of two other small countries with big banks, Iceland and Ireland. Iceland went bankrupt but the UK felt obliged to bail out Ireland, even though the country had been independent since 1916.
Equally the banks themselves have expressed nervousness about being domiciled in a country that could not bail them out if problems came out. Most of Scotland’s big banks have therefore suggested they would relocate to the City of London if Scotland votes yes, creating another potential headache for Treasury officials trying to ensure what emerges north of the border is a viable country.
The truth about the task facing the Treasury is that no-one really knows the answers to most of the big questions because the UK is so intertwined that every issue is a matter of opinion. One thing is clear though: whilst the English are begging Scotland to stay, no one is nice in the divorce court.
UK voters will demand a tough line on currency, oil and banking as well a pile of other issues that the Treasury hasn’t even thought of yet.