Fear of advances by the nationalist parties, particularly in Scotland, led to the suppression of a report from Scottish Office economist Gavin McCrone that suggested that an independent Scotland would be 'chronically in surplus'. By 1977 by-election losses and defections to the breakaway Scottish Labour Party left Callaghan heading a minority government, forced to trade with smaller parties in order to govern. An arrangement negotiated in 1977 with Liberal leader David Steel, known as the Lib-Lab Pact, ended after one year. Deals were then forged with various small parties including the Scottish National Party and the Welsh nationalist Plaid Cymru, prolonging the life of the government.

What led to the promotion of a report from the Scottish Office?