I had an exchange with the eminent UK constitutional lawyer George Peretz QC last night as a result of my claim in my response to Andrew Neil that Scotland would not owe debt to the rest of the UK in the event of it becoming independent. I have, of course already detailed this suggestion, making clear in my title at that time precisely what I meant:
However, this issue is important and so the exchange is worth sharing:
For the record, this is the first document George Peretz shared:
He also shared the 1921 Irish agreement that he claimed was a precedent:
So, what to say? First, that I am grateful for the engagement.
Second, of course, I appreciate that there are differing views on this issue.
Third, I do not think the UK Treasury view is binding in the face of the wish of a country to be independent and it is slightly naive to think it is.
Fourth, to presume that a gold standard era agreement is now a precedent is absurd: that would be like arguing a provision for slaves might be required because in 1776 this could have been an issue when the US became independent. Times move on, thankfully
And fourth, to suggest game theory matters is no more than saying that everything is up for negotiation.
And that is just what I have said. But the key issue is a simple one, and was ducked, and that is the point I made in my first piece, linked above. In essence, this says this is a three-part process:
- What is the debt? This will certainly not be based on gross debt, but only on adjusted debt net of QE allowing for where the debt might have arisen i.e. for Scotland's oil contribution;
- When is the debt repayable?
- What interest rate is due on it until repayment occurs?
That's it. The rest of the negotiation on this issue would be padding. So what are the answers? They are, I suggest:
- As noted in my previous piece, any debt owing is much smaller than a proportion of gross UK debt of £2 trillion divided by head of population, which no doubt would be the Treasury view. My argument is that it is very much less than that, and not just because of QE.
- That debt would only be repayable when the rUK repays it. That does not mean when the rUK rolls it over as part of its debt management programme: that means when it actually in net terms repays it, and until then Scotland cannot be expected to make payment towards something the rUK is not doing;
- The interest rate on the net debt agreed in (1) would be due at current long term interest rates which on rUK debt are a maximum of 0.6% right now.
I strongly suspect I am right on 1, and that is allowed for in the document George Peretz notes.
On 2, there is no way Scotland could or ever should agree to repay what the rUK is not actually paying, and since the UK has not repaid debt since 2001 and has only repaid £37 billion whilst borrowing more than £1.8 trillion since 1946, I really do not see any repayment being at all likely - which is the basis of my claim to Neil.
And of course interest is owing, but on the basis of this suggestion, it will be no big deal.
In other words, I am agreeing with George Peretz and am then saying next to nothing is owing. Because it is not.
So why does this matter? I suggest it's because that unless this thinking is done now, and aired now, and becomes commonplace in discussion now, then the SNP negotiators with London come post-independence negotiations will not present a case like this, and so will get a bad deal for Scotland. And that is, I think, unacceptable. So this issue has to be addressed in this way now to ensure that it is on the table when the time comes, as I hope it will be.
There is no way on earth I want Scotland paying the rUK a penny more than it has to in any currency that might be in issue at the time. And game theory or not, what I have suggested is totally fair, and that's why I make the point. I would not waste my time otherwise.
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As someone who lives in England, why are you so obsessed with Scotland being independent, Richard?
Why do you devote so much time to it? I find it really strange. What’s in it for you?
Nothing is in it for me
I am technically interested
And I am also aware that if I was Scottish I would seek self-determination
And as someone who lives in England I am offended by the idea that we have the right to deny that
Richard,
It seems to me that the arguments around Scottish Independence, irrespective of whether you support it or not, are very good for demonstrating MMT
I find that (I think!) I understand it better than I did from these examples.
“As someone who lives in England, why are you so obsessed with Scotland being independent, Richard? Why do you devote so much time to it? I find it really strange. What’s in it for you?”
A majority of Scots think the UK has been badly governed for decades. They believe they can do better! Richard and I also share this belief. Is this a crime?
I reflected on this again after I replied and thought it such a strange question, indicative of our times.
Why shouldn’t I care because I have no self interest?
Maybe I can be more useful because I haven’t?
I have looked at this Ireland claim before and Ireland did not in fact take on liability for any UK debt regardless of the Treaty text. The only debt that Ireland took on was for a Liberal Government policy from before WWI which provided cheap loans for Irish tenant farmers to buy out their landlords. The farmers then repaid the loans over a very long period. So Dublin agreed to carry on collecting the repayments and handing that money over to London. Ireland stopped paying London around 1938 (but carried on collecting the money from the farmers!) and London wrote off the balance still owing.
I would still stick with the primary position that the UK is the continuing state and therefore takes the assets and liabilities. If they prefer to share them then all they have to do is to dissolve the UK. If we do end up paying anything towards the liabilities then Scotland should immediately claim a share of the assets, such as foreign property like embassies and a share of the net reserves of $55 billion.
George Peretz did note why: there was an opt out when the rUK failed to do a border review
Nice to see, at last, that someone has actually mentioned the issue of sharing the assets should Scotland take on some of the liabilities.
I have done the same
But since the national debt is not repaid there will never be any reason for Scotland to pay for what the rUK does not pay either
Worth pointing out that the 2013 White Paper was predicated on the continued use of Sterling as part of a formal currency union. When the UK Government refused to countenance such a union, Salmond and other SNP politicians made clear that there would be no apportionment of debt without it. So the White Paper is maybe not quite the precedent that George Peretz suggests.
Indeed
As Tim says, if the assets are shared then so could the debt be shared, and repaid when net debt is repaid by rUK as you point out in 2 above, provided that the debt the rUK repays is actually debt which is shared by Scotland and not debt which has been contracted post independence or for which it has no liability.
Agreed. There will be some fun drafting this.
Peretz is absolutely correct about game theory. Look how painstaking Brexit has been. It will be about “who gets the best deal” albeit the best in this case here is what is deemed in the eyes of the electorate. One must assume Westminster will make it difficult and on that basis any belief there will not be a “deal” struck re outstanding debt is naive in the extreme. How the deal is played out now is ideal conjecture of course unless you are an expert in constitutional law. And even if you were you would be met by an opposing view by someone with equal expertise on the other side. So yes it will be game theory , England will push for a transfer of debt and the process will be long and arduous before there is an outcome.
Have you not noted I have said there will be a deal?
Why not engage with the arguments?
Just say no! rUK is the continuing state and keeps the assets and liabilities except for what is physically located in Scotland. It should be a very short negotiation as the only things to discuss are:
1) Payment of the state pension and pensions of (former) rUK employees based in Scotland at Independence Day. Should these be paid as per law by rUK or should rUK pay appropriate funds to ScotGov so it can take them over post Independence.
2) Handing over the records for National Insurance / pensions, HMRC, passport / citizenship, DVLA and anything else relevant and not already under our control.
3) Transfer of the national map database from Ordnance Survey to ScotGov.
4) Arrangements for a short-term rental of Faslane.
5) Arrangements for removal and / or handover of UK military bases, office buildings or other rUK owned premises. Note in law they become ours but rUK would be entitled to remove furnishings and the like.
6) Future customs and border arrangements.
Is there anything else that needs to be discussed? Not that I can think of just now.
7) Repatriation of Scottish artefacts from the British Museum / British Library / National Gallery. They will no doubt refuse but I would at least ask to have things like the Lewis chessmen and the Roy map of Scotland back.
So as we are not asking rUK for anything much then what power do they have that is going to force some sort of debt settlement onto us? In fact the boot is rather on the other foot since they desperately want and need Faslane.
Yes, nuclear waste
Good point. I had forgotten about the waste.
George Peretz’s gives the game away. His argument is that Scotland must do whatever rUK says because it says so irrespective of how illogical rUK’s argument is and the fact they have long form on flouting it (See below). Upholding the concept of democracy and therefore the Rule of Law isn’t figuring big in George Peretz’s thinking. He needs a rethink!
https://bankunderground.co.uk/2017/08/08/your-country-needs-funds-the-extraordinary-story-of-britains-early-efforts-to-finance-the-first-world-war/
“But your honour the government’s attorney argues it has a right to demand this money from Scotland when it’s clearly shown it can conjure the amount asked for both at whim and on its own!”
🙂
Yes Helen – you have it right. It’s all about having the ‘privilege’ (or thinking that you have the privilege) to make such an argument based on an arrogant view that one is well……. superior.
I will pass over the fact that Britian has already played fast-and-loose with Scotland’s long established borders/territorial waters (over oil, for political reasons). I will pass over the fact that the Scottish Government has completely botched every policy it has ever devised on currency, and has said many ill-judged things on currency.
Ireland accepted bad economic terms on independence; I suspect they did so because economics did not constitute any part of the reason it left; but I have not studied the issue closely enough to do more than speculate on that; nevertheless it was a bad decision to accept it – and it did not last. Mr Perez’ Irish precedent is (like so much in law), a leftover; an anachronism. Nobody would accept these terms in the modern world.
I do not agree with Richard on debt interest; I do not believe Scotland should accept any of the debt, including surmised interest. Britain had the chance to negotiate a shared currency (I think the SNP were wrong in 2014 to propose it, but the offer was made). The offer was refused. rUK must have sole ownership, and sole control, of everything (currency, Central Bank, debt, everything). That must have consequences – not just and solely adverse consequences for asn independent Scotland, and a great deal more than a free lunch handed to rUK. rUK is actually trying to make debt-dumping look reasonable, but for Scotland to accept any debt will be no better than a Ponzi scheme. I consider the currency the principal asset of the British Union state. All the liabilities go with the asset. That is already agreed. Britain has already recognised this; that is a fact. Dissolution is not an option. To leave an independent Scotland without any rights in its long-established currency, and a debt liability in a now foreign currency, is simply unacceptable: totally unacceptable. Scotland is taking a very reasonable approach in accepting that it has no further rights in the currency, and must make its own way on currency matters; and there can be no justification for it to take that on, while simultaneously accepting continuing responsibility for a debt in a foreign currency, over which it has no control whatsover. For the avoidance of doubt: that isn’t independence. It defines dependency. It would be gross stupidity to accept the debt. Mr Perez is a lawyer, and perhaps does not understand the actual implications or consequences of such a proposal, but it simply must not be allowed to stand.
The only way this transfer of debt could happen is if Scotland allows rUK to bully it into accepting the unacceptable. This would be a serious mistake that would take a long time for Scotland to shake-off. An agreed deal is in both parties interests. Britain will never admit to an equitable agreement ex-ante independence, because it does not want it to happen, ever; independence has to be made to appear impossible. rUK will quickly change its tune ex-post independence happening. It always does, throughout history. At that point the negotiations change drastically.
Scotland is looking for no more than an equitable deal; rUK needs a lot more; it has huge stakes in the UN Security Council, IMF, G8, independent deterrent etc., etc. It needs an equitable deal that does not change or damage its world status. rUK has a lot to lose from a difficult deal with Scotland, and much to gain from a smooth agreed deal.
I hear you…
This proposal is a sound and logical one,if the Scots have any sense tbey will take this as a negotiating stance.
I was born in Scotland but live in England.
Well done for some original unbiased thinking,
Would it not however be prudent to start repaying the debt up front to shield Scotland from lump sum demands down the line if and when rUK decide to repay? I appreciate that quantifying the amount might be tricky and would rely on trust? But if we are, in principal liable, should we not just cough up for a rainy day, so to speak?
Why?
And how?
Scotland has no means to do such a thing
And why would it want to do so?
The national debt is a good thing – it’s the capital on which our society is built
Richard,
“The national debt is a good thing — it’s the capital on which our society is built”
You neatly make my point. Yes it is. But it is appalling if such debt comes not in the form of currency issuer debt, but in the form of everyday/household (currency user) debt (or interest); in a foreign currency, to boot. Over which you have no control (subject to unforeseeable events, policy changes in a foreign country, or currency fluctuations): QED.
Agreed…
I’m not sure what your questions mean. In your article you say that Westminster does from time to time repay debt. If some of that debt was incurred on behalf of Scotland surely we would be liable for some repayment too. (I am talking about starting repayment upon Independence not right now)
As to how, well I presume in whatever way Westminster say we can, but I don’t know.
I am pretty sure Scotland wouldn’t want to but is that really the right question?
There has been no debt repayment since 2001
On average it’s been £0.5 billion a year for the last 75 years
We ‘borrowed’ £1,780 billion or more in that time
My point was payment is irrelevant in that case
It’s never going to happen as a generation has not passed. When will those pro Indy not accept the result in 2014. There is no reason in my opinion to hold another referendum.
There was no agreement on a generation
And there never could have been
Respectfully, stop talking nonsense
And pray there will be a referendum as the alternatives are much uglier and horribly undesirable
The result of 2014 was accepted. Scotland is still in the Union. Government goes on. Government is accepted. The “guarantee” was an opinion. It was not an agreement, and it does not bind a single member of the population. Nobody is entitled to speak for the Scottish people for a generation, and commit their future decisions on their lives: nobody. People are entitled to pursue their opinions, and persuade others; if they do persuade others, so be it. You will have to live with it, just as those who wish independence live with the Union now.
There is a technical term for all this ‘Carol’, that perhaps you need to engage with: it is called ‘politics’.
Same entitlement as belonging to those who chose to vote to leave the EU, although conveniently you don’t seem to want to respect that entitlement in the same way.
Except it’s not, if you had the slightest idea what you were taking about
Mz Brookes,
Please leave the EU. I have no problem with rUK leaving the EU. I do not believe Britain was ever a sincere member; Brexit shocked me, but did not surprise me. So be it. Scotland does not want to leave the EU.There is the difference; we really do not want to pay the price of Brexit, in so many ways. You clearly do not “get it”; but that is your problem. Scotland has decided to stop trying to explain to an obtuse partner that does not listen, cannot even understand, and clearly does not care if everything is not precisely the way it wants it to be. So be that too.
The EU is a less centralised, a less invasive and more civil Union, from a Scottish perspective, from a long, long history of Scottish Europeanism; fishing is one of the few problems we have with the EU; mostly there is upside. If you do not agree or see our viewpoint, that is your prerogative; just do not expect the Scots to care much any more, what you think about it. More and more Scots have simply had enough of blank obstructionism of our urgent needs and requirements.
Britain has not worked for Scotland for many, many years. Scotland is not adverse to Unions, we just like to choose the ones we wish to live in. rUK does not like Unions; or at least Unions it cannot, sooner or later, turn into over-dominance.
Go you own way. rUK has Scotland’s blessing; don’t just assume you can drag Scotland forever into the endless, repeated mess and misery rUK casually leaves in the wake of its bullying aspirations; the detritus Britain leaves behind (EU, Empire) is constantly the wreckage of discarded piracy. We have had enough.
I’m sorry, something doesn’t compute. You are on a website about tax and you think the once in a generation comment is somehow a legal statement?
Why exactly are you here?
Carol, “once in a generation” was never part of any manifesto or policy on either side. It was a casual remark made by the pro-Indy side in the 2014 run up to polling to encourage the people to get out and use their vote. Nothing more, nothing less. It has however been seized on by the pro-Union side in the hope that the wider public will be gullible enough to believe it was somehow contractual. Sadly it seems many do.
You may also recall that various promises were made by the pro-Union side immediately before the vote in outright breach of UK’s Purdah-rules (the Electoral Commission made no attempt to enforce purdah). Depending on whether you live in Scotland or elsewhere, you shouldn’t be surprised to learn that these promises were not kept. Not least among these was the promise that a vote against independence was the only way that Scotland could remain in the EU. Scotland did vote by two-to-one to remain in the EU in the 2016 EU referendum and look how that turned out.
No one should be surprised that all manner of tactics will now be used, dirty and non-dirty, to stop Scottish independence and for a variety of reasons but mainly to allow continuing exploitation of Scottish people including that of bankers (Onward imperialism!).
The latest is Scotland can’t afford it because of the size of the debt it will owe to rUK. This con is especially reliable because the majority of voters haven’t a clue how the monetary system they live in really works and how it relates to democracy.
Clearly hanging the threat of debt over voters’ heads worked a treat it delivered ten years of austerity and the slashing of public goods and services and the subsequent impoverishment of many was then in itself used in part to leverage the Brexit vote!
Of course there’s continuing “imperialism” of capital in the EU and the Scottish people will have to tread very carefully in relation to this should Scotland become independent. It’s hard to tell whether their “thirst” for increased democratic control over what happens in Scotland will resist this insidious “imperialism” long term given free market capitalism rightly won the battle over monolithic state controlled capitalism.
We recently paid a fee and switched energy providers in mid contract. It strikes me that Scotland is in a somewhat similar situation. Scotland is stuck with a totally incompetent, totally dishonest government provider, over which it has no influence. It would like to switch to a better government provider. Since this would be a benefit, the question is what fee does it need to pay? Just as we did not have the power to simply walk away from our energy contract, Scotland does not have the power to walk away from its current government contract. On the other hand, for reasons set out in your post and the comments, it is not in the current provider’s interest to enforce the contract indefinitely. A deal is in everyone’s interest.
One last point, things change. When we took out the first energy contract, it was a good deal. In the future, service from a Scottish government provider might deteriorate unacceptably, and the English government provider might improve.
Not the same at all in my opinion
This reduces the right to self determination to contractual form, and I don’t buy that (implicit pun intended)
You are describing a contract that doesn’t exist. It is a made-up contract instituted by political trolls.
The terms of Scotland leaving the Union is by mutual negotiation under international law. International law has no fixed “code” beyond mutuality. The lawyers resort thereafter to soft ‘opinion’, thick in ambiguity and distinctive and very different cases, in different circumstances, leading nowhere solid.
We need not debate however, because we already know the answer. rUK is not going to negotiate. It is just assuming ‘continuator state’ status for rUK. This is not a negotiation, but a decree. rUK has taken the currency and central bank, assets and liabilities in their entirety. They have already committed to that, without any exceptions. Scotland is excluded from control over its own currency.
Scotland accepts that, because nobody wants dissolution. rUK is not, however free simply to have what it wants, as if it can dispense with mutuality entirely, wherever it suits rUK; and insist on mutuality wherever it suits rUK. rUK is not free to renegotiate the currency deal it has already issued to the whole world; only manipulated in detail privately with Scotland on a pick-n-mix basis, at rUK’s exclusive option, to select what Scotland receives from this non-negotiation; and lo, all Scotland receives out of the currency settlement (its own currency!) is responsibility for the debt – and apart from that, you are on your own Scotland!
This proposition only has to be stated to be quite obviously ludicrous. The price of rUK taking everything in currency matters is written on the tin: it takes everything, including all the debt. rUK quite manifestly, and as it know quite well, for good reason, wants the currency so badly it wants it all; well, it can have it all – but only when it takes the lot.
I think that exceptionally well said
Repeat, often
John,
That is a good point on legality. International treaties are indeed just agreements between two sovereign nations and they decide on mutual rules of any agreement,within certain boundaries like WTO,but those boundaries are usually not that specific.
So there is no position or basis for legal opinion to be inserted before a deal has even been struck. Quite frankly judges/lawyers should keep out of it altogther as this will be first and foremost a political agreement. This is a personal opinon from a lawyer and as such amounts to no more than anyone elses personal opinion. Besides as Richard says he is not actually saying much that adds to the greater knowledge.
Thank you Mr Richardson; and noted.
Good comment but we confuse ourselves by using the word “debt” when what we’re talking about is control over a “flow” and who should be in charge of operating a flow. The whole point of MMT is to point this out that anyone one can create a credit/debt (credit/debit) financial instrument the problem is to get it to stick, or be widely accepted, but the best way is to have the power of the state behind you.
So not only does rUK retain the power to increase the flow to compensate for loss of control of income from Scotland (think Wynne Godley’s Sectoral Balances) a new Scottish government can simply turn on a new flow from the start of its independence. It’s just like magic! See Wray’s paper “Outside Money: The Advantages of Owning the Magic Porridge Pot”:-
http://www.levyinstitute.org/pubs/wp_821.pdf
P.S. And guess where oats for porridge grow well:-
https://en.wikipedia.org/wiki/Porridge