Whatever the referendum vote on independence, Scotland will be given more devolved powers. Either way, it needs a different system to manage its finances
March 24 2016 could be a landmark date not only for Scotland, but also for the rest of the UK. That is the date selected by the Scottish Government as independence day. Of course, before then, there is the momentous matter of the referendum on the other landmark date: September 18 2014.
As Scotland prepares to vote, there is unprecedented interest in information about the future financial position of the nation, interest that shows no sign of diminishing. The energetic debate we have seen unfold over the last two years has, however, ignored the fact that there is a significant absence of understandable information about the current financial position of Scotland, especially any that takes in the whole of Scotland’s finances.
It was in this context that CIPFA produced our paper Scotland’s future in the balance. This was the first piece of work to recognise that, despite the appetite for financial information, the current picture in Scotland could not be adequately assessed.
So why is it, that something as critical as Scotland’s true financial position, cannot be identified? The answer lies in the UK approach to public finances and to a system of funding that does not require Scotland, or the other devolved nations, to report separately on their finances or even to prepare their own public sector balance sheet.
It was in this absence that CIPFA undertook to estimate what a devolved Scottish balance sheet might look like. After trawling the accounts of Scotland’s public sector bodies, we found that it has assets of about £84bn against liabilities of about £100bn. This is not so surprising, as it is common for governments to maintain a negative equity position. The UK balance sheet, for example, shows a current deficit of about £1.3trn.
So CIPFA’s Scottish balance sheet demonstrates that the current devolved financial position has similar characteristics to the UK balance sheet. However, we believe that reporting a balance sheet is not enough in and of itself: it has to be managed. In light of this, our report also concluded that whatever the outcome of the referendum, Scotland must be able to report on and manage its finances differently in the future.
But what will that future look like? Looking just a few weeks ahead, there are of course only two possible outcomes from the referendum: to become independent or to stay within the union. But importantly, what many people don’t realise is that there will be change ahead for Scotland no matter what the outcome of the referendum.
A yes vote will clearly bring all of the powers associated with an independent nation, but under current proposals a no vote is not simply a vote for the status quo. All the main UK political parties are planning devolution of enhanced powers for Scotland and the Scotland Act 2012 already provides Holyrood with a new set of fiscal levers, including the first tax-raising powers for a Scottish Parliament in almost 300 years. It is clear that, in the event of a no vote, Scotland will still be embarking on a new fiscal journey.
So looking further ahead, what might Scotland’s financial future actually look like? We can already begin to consider what the fiscal position could be for Scotland, whether independent or not.
CIPFA estimates that in 2016/17, the first year of independence if achieved, and assuming that a proportionate share of UK national debt is recognised, Scotland would spend about £69bn. We estimate tax revenue in that year at about £65bn, generating a shortfall of about £4bn or about 6% of total spending.
Before we rush to judgment on affordability, it’s also worth looking ahead to the projected position in that same year for the UK. In 2016/17 estimated public spending in the UK will be £753bn against tax revenue of £671bn, meaning the UK faces a shortfall of £82bn or 11% of total spending.
This shows that the challenges which could face an independent Scotland are again not dissimilar to those facing the UK, though other factors will of course have an impact.
An independent Scottish Government would have greater levers with which to manage its financial and economic position. It would, for example, be able to borrow and hold reserves to smooth funding over several financial years and to plan long-term for sustainable public services. Set against this are significant challenges such as the volatility of North Sea revenues and the debt interest rate.
But there are other, more immediate challenges. The lack of a current balance sheet means that the separation or sharing of assets and liabilities between an independent Scotland and the rest of the UK will be identified by negotiation between governments. This increases the importance of any negotiated settlement of assets and the need to reassure the public about this process.
If independence is rejected by voters, then the one certainty is that the Scotland Act will enable £2.2bn of borrowing while also allowing the introduction of a Scottish rate of income tax. In addition, the three main Westminster parties are united in promising more fiscal powers, with each of them establishing a commission to make recommendations.
The Scottish Labour Party’s independent commission proposed the ability to raise 40% of tax income, while the Liberal Democrats proposed devolution of most taxes except corporation tax. The commission established by the Scottish Conservatives proposed full powers over the setting of income tax (but not personal allowances) and the assignment of a share of VAT receipts.
Amongst all this one thing can be relied on: the people of Scotland will be voting for change on September 18, no matter which way they cast their ballot. The outcome of the referendum is the most hotly anticipated political event of the year and arguably the most significant vote in the UK for a generation. It will tell us what that level of change will be, not just in Scotland but in the rest of the UK as well.
Don Peebles is head of CIPFA Scotland
This opinion piece was first published in the September edition of Public Finance magazine
