The term “angels’ share” comes from the ancient Scottish tradition of Whisky making and refers to the phenomenon of sealing up a volume of whisky in an oak barrel only to find less fluid in the sealed barrel when it’s re-opened. We can only assume that it was a mite confusing to people in the past to have sealed up a resource and find when they opened it back up that it was less than before.
Specifically, it’s the portion of a whisky’s volume that’s lost to evaporation during the ageing process, which is deemed to have been consumed by angels. But there’s a more modern version of the “angels’ share” at play in modern Scotland, and this one’s a celestial snaffling not of whisky, but of Scotland’s money.
To understand what’s going on we need to look at the debt of the UK, how that debt is built up, and how much we’re currently (notionally) liable for.
The UK needs to borrow because it spends more than it receives in tax revenue. To finance this shortfall, the UK government sells bonds, gilts and treasury bills to various types of investors, including private sector institutions such as pension funds, investment trusts and banks.
We know from the GERS report for 2011-12 that the UK’s financial position, including 100% of North Sea revenue, was a deficit of £121 billion (or 7.9% of GDP), and that Scotland’s deficit was £7.6 billion (or 5% of Scottish GDP) including our geographical share of North Sea revenue.
But that’s not the end of the story. Scotland is in fact allocated a share of the UK deficit based on a population percentage (8.4%). This means that in 2011-12, Scotland ran up a £7.6bn deficit but got debited with £10.2bn of the UK deficit onto our debt balance – £2.6bn more than our fair share.
We’ve previously noted this invisible subsidy that Scotland gives to the UK, but there’s more to it. The overall UK government debt stands at a frightening £1.38 trillion as of the end of 2012-13. Scotland’s 8.4% share of this debt comes to £116 billion and would be, we’re told, the liability that Scotland should accept post-independence.
Scotland already pays interest on the 8.4% of UK debt we’re allocated – which according to GERS amounted to just under £4.1bn in debt interest payments for 2011-12 (or 6.3% of Scotland’s entire expenditure). But the really interesting information only comes when you start to look at who that debt is owed to.
Since 2009 the Bank of England has pursued a policy of “quantitative easing” (QE), whereby the bank electronically “prints” money that it then uses to buy UK government gilts and bonds. The UK government now has this newly-created money with which to fund their deficit and pay for public services.
In layman’s terms it’s no different to forging money on a printing press in your shed to supplement your wages, and has become a favourite of not just the current government but the previous Labour administration also. It has allowed the UK Government to raise funds that it would have struggled to raise on the markets, and which it knows it would struggle to pay back.
Much like forgery, the policy has some major drawbacks, not least of which is that QE is deliberately intended to increase inflation. Anyone who’s seen the increase in the cost of living over the last few years will undoubtedly be worried – especially as wages are struggling to match – but it’s an explicit purpose.
Another drawback is that QE can also devalue the currency and any debt held by investors that is denominated in Sterling. This has the effect of decreasing the purchasing power of the pound relative to foreign currencies – putting up the price of imports and effectively giving everyone in the country a stealth pay cut – in the hope that this leads to reduced cost of exports, boosting the export economy.
However it isn’t any of those effects that interest us today. It’s the fact that the UK Government owes a great deal of debt to the Bank of England, which is in turn owned 100% by the UK government. Crazy as it sounds, it’s a situation whereby the UK government essentially owes ITSELF a sizeable chunk of its own debt.
We know that as of 6 February 2014, the Bank of England owned £375bn of the £1,380bn national debt of the United Kingdom. The entire QE program has been given over to buying UK government gilts, meaning that using the most up-to-date figures the Bank of England holds around 27.2% of UK debt.
From an independence standpoint the effect is startling. Clearly an independent Scotland, denied its share of the Bank of England, would not be liable for debt which the UK owed to itself, making the true debt figure to be split post-independence far lower – £1trn instead of £1.38trn.
This would provide an independent Scotland with a population-based debt share of £84.4bn. Clearly this would make independence a more viable prospect and have far-reaching effects on the finances of an independent Scotland.
In a further twist to the tale, the Treasury has decided to take the accumulated interest payments on the stock of government debt the Bank of England has bought via QE and put it on the government’s books rather than the Bank of England’s. This means that the interest that the UK pays on its debts is paid to the Bank of England, who then in turn credits it back to the Treasury.
Still with us? We’re nearly done.
As we already noted, Scotland paid £4.1bn in interest payments in 2011-12 on the 8.4% share of national debt allocated to us, of which 27.2% was owed to the Bank of England. This means that Scotland has paid around £1.12bn in interest payments to the UK government – essentially acting as an additional stealth tax on Scotland since we, unlike Westminster, don’t then get the money credited back.
Scotland has therefore not only subsidised the rUK by taking on board £2.6bn of debt more than we actually ran up, but we then also paid an additional £1.12bn in interest on debt we owed to ourselves.
As a result of how the Union is financed, Scotland has paid interest on money it owed itself, yet when it comes to look at its accounts that money has disappeared, siphoned off into the Treasury as the UK government’s “angels’ share”.
(And then to add insult to injury, these payments are counted as deficit and used by Unionists as proof we couldn’t afford independence.)
A Yes vote, then, would deliver an “independence dividend” of over a billion pounds a year in interest savings alone, without having to cut a single service. On top of other instant savings like £800m on defence, the £50m annual contribution to running Westminster and only paying our fair share of UK debt rather than £2.6bn extra, Scotland would find itself over £5bn a year better off at the stroke of a pen.
Or, if you prefer, a cross in a box.