The most dangerous subject in UK politics

The Smith Commission Report was released this morning, outlining the powers that will be devolved from Westminster to the Scottish parliament in Holyrood. One detail stood out above all others.

Scotland will have more tax-raising powers, more control over welfare spending and the structure of its welfare system and the Scottish Parliament will gain more control over the organisation of elections, which opens the possibility of 16 and 17-year-olds getting the vote. But none of these is the most significant detail.

On p26, paragraph 95 (5) of the report is the sub-heading “Borrowing Powers”. The report states that: “Scotland’s fiscal framework should provide sufficient, additional borrowing powers to ensure budgetary stability and provide safeguards to smooth Scottish public spending in the event of economic shocks.

“The Scottish Government should also have sufficient borrowing powers to support capital investment, consistent with a sustainable overall UK fiscal framework.”

This new borrowing power is fiscally and politically the most significant change that is being suggested today. The details are scant, and a reassurance is given that: “Borrowing powers should be set within an overall Scottish fiscal framework and subject to fiscal rules agreed by the Scottish and UK Governments based on clear economic principles.”

The consequences of this change are potentially enormous. Consider the position of an individual or organisation that, for whatever reason, wants to buy UK government debt and is presented with the option of buying sovereign bonds from either the London government or the Scottish. International investors and institutions will inevitably prefer the more familiar UK debt, meaning that to attract lenders, the Scottish government will have to offer a higher rate of interest to lenders. If these changes are put through and Scotland is given borrowing powers, then its borrowing costs will be higher than those of the London government.

To make sure that the spread between Westminster and Holyrood debt did not widen too far, the Bank of England would have to stand behind the Scottish Parliament’s debt. That assurance could not be given without at least a Westminster parliamentary vote and it is not certain that MPs would vote for monetary union with Scotland while ceding control over borrowing. That arrangement—monetary union without political union—was a central characteristic of the Eurozone catastrophe. Devolving borrowing power to Scotland has the potential to become the most dangerous subject in UK politics.