By Richard Johnstone | 18 November 2013
An independent Scotland would need to make ‘significant’ cuts in public spending, or increase taxes, in order to put its public finances on a sustainable long-term footing, the Institute for Fiscal Studies has warned.
In an examination of what independence would mean for Scotland’s public finances, the think-tank found cuts would need to be made in addition to those already announced by the UK coalition. These would be needed to account for Scotland’s ageing population and predicted falls in tax income from the oil and gas sector, the research published today stated.
Projecting the finances of an independent Scotland over the next 50 years, the IFS said Scotland would need to make a fiscal adjustment equivalent to 1.9% of national income from the start of the 2020s. This would put public sector debt on course to reach 40% of gross domestic product by 2062/63, the level the IFS says is sustainable.
The extent of action needed is greater than the comparable ‘fiscal gap’ for the whole of the UK, which the IFS says requires an adjustment of 0.8% of national income over the same period to stabilise debt.
Taking action to stop debt becoming unsustainable would require difficult choices for the Scottish Government, the report added. A 1.9% spending reduction is equivalent to a 9 percentage point increase in the basic rate of income tax, or an 8 percentage point increase in the standard rate of VAT.
In its analysis, the think-tank calculated that public spending per head is higher in Scotland than the rest of the UK, while taxation from onshore activity raises a similar amount.
In 2011/12, the difference between spending levels in Scotland and the rest of the UK was more than made up by higher tax revenues from North Sea oil and gas production.
However, as these fall in the future, the long-term outlook for public borrowing is less favourable for Scotland than for the UK as a whole.
Although the exact nature of the fiscal challenge would depend on how much debt Scotland inherited from the UK, the IFS said public sector net debt was likely to rise above 100% of national income by the early 2030s in the absence of extra fiscal tightening.
Report author and IFS programme director Gemma Tetlow said this meant an independent Scotland faced fiscal choices that were even tougher than those faced by the UK.
She added: ‘In 2011/12, higher public spending per person in Scotland was more than matched by higher revenues from activity in the North Sea. However, over the long term, revenues from the North Sea will probably decline and official population projections suggest that the average age of the Scottish population will increase more rapidly than for the UK as a whole, putting greater upward pressure on many areas of public spending.
‘As a result, to ensure long-run fiscal sustainability, an independent Scotland would need to cut public spending and/or increase other tax revenues more than would be required across the UK as a whole.’
Responding to the IFS, Scottish Finance Secretary John Swinney insisted the report underlined the case for an independent Scotland with full control of its economy.
‘It is no surprise that projections based on the UK’s economic position show a long term deficit when the OBR state that the UK’s economic strategy was ‘unsustainable’ and that the UK will run a fiscal deficit in each of the next 50 years,’ he said.
‘The whole point of independence is to equip Scotland with the competitive powers we need to make the most of our vast natural resources and human talent and to follow a better path from the current Westminster system which stifles growth and which is responsible for the damaging economic decisions which this report – and its projections – are based on.
‘Scotland has strong financial and economic foundations, and even without a single penny from oil and gas, both output and tax revenues per head in Scotland are virtually the same as for the UK.’
