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SNP in a difficult market place

THE Treasury's decision to inform the markets that it would honour all UK debts in the event of Scotland becoming independent was, as Alex Salmond noted, a commonsense move.

The debt was issued by the UK Government and it is the UK Government that would remain legally liable for repaying it whatever the outcome of September's referendum. With investors beginning to question the possible consequences of independence, and weighing up whether they should charge a "risk premium" in case debts transferred to an independent Scotland proved harder to recover, Chief Secretary to the Treasury Danny Alexander was right to clarify the position and spare taxpayers across the UK, including in Scotland, possible higher borrowing costs.

The decision means that a newly independent Scotland would not be held legally liable for a share of the UK's £1.4 trillion debt mountain yet that is not the cause for celebration some Nationalists seemed to think yesterday. The First Minister insisted it placed an independent Scotland in "an extremely strong position to negotiate a fair deal" if it came to carving up the UK's assets. But his oft-repeated threat to walk away from the debt unless, for example, the UK accepted his plan to share the pound in a currency union sounded as reckless as ever yesterday.

The Treasury said it would expect an independent Scotland to take on a fair share of the debt (something Mr Salmond accepts if the rest of the settlement is right) but there is still no way of knowing how negotiations between Edinburgh and London might go. No doubt the UK Government believes it would be in a strong negotiating position if an independent Scotland's preferred alternative to a currency union was, as Mr Salmond has hinted, to continue using the pound unilaterally, a plan dismissed out of hand by most economists and even his own advisers.

The Treasury move highlighted another difficulty for the Nationalists. It suggests that investors have come to the conclusion that an independent Scotland would be in a weaker fiscal position than the UK as a whole and would charge higher interest on loans to the Scottish Government.

Sources yesterday suggested an independent Scottish Government could be paying about 1.5 percentage points more to borrow from the money markets. If true, it would damage an independent Scotland's ability to fund public services.

These observations appear to follow last November's report from the Institute of Fiscal Studies think tank, which suggested an independent Scotland faced a bigger fiscal gap (the difference between spending and revenue) than the UK, over the long term, as a result of the country's ageing population and declining income from North Sea oil.

An independent Scotland would face higher tax rises or deeper spending cuts than the rest of the UK to bring its finances under control, the IFS argued. At the time Mr Salmond argued that Scotland needed full powers over the economy precisely to avoid such a gloomy future. The City of London, it seems, does not share his confidence.

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