Think tank recommends independent Scotland buys its freedom with debt for oil swap

A research team at think tank NIESR has recommended some out of the box thinking for an independent Scotland to deal with what would be mountainous fiscal imbalances.

An oil for debt swap – where the oil revenues would pass over to the UK in exchange for a large write down of the debt that Scotland would otherwise assume - would greatly reduce the economic risks of independence, although there may be significant political limitations to this possibility.

NIESR's research notes that an independent Scotland would have to face inheritance of a quantity of public debt that may act as a large fiscal tightening on the region's economy.

Scotland would have to run a tight fiscal policy to achieve a sound debt level under those borrowing costs. Using the lower bound borrowing cost, Scotland would need to run primary or underlying surpluses (excluding interest payments) of 3.1% annually order to achieve a Maastricht-defined debt to GDP ratio of 60% after 10 years of independence.

Given Scotland’s estimated average primary fiscal deficit of 2.3% (including taxes from oil and gas) over the period 2000-2012, running a surplus of 3.1% would represent a fiscal tightening of 5.4%.