How sustainable are Scotland’s finances should there be a vote in favour of independence in September? A new analysis of the nation’s assets and liabilities gives an early indication of the numbers involved
As commentators and stakeholders continue to trade increasingly complex financial figures in Scotland’s referendum debate, a newly published paper from CIPFA asks (and answers) a series of different questions.
These include whether tax revenue in an independent Scotland will be enough to support public services and what the current devolved financial position actually is. Only by answering these questions in a structured way can we begin to unlock the answer to the wider debate around affordability.
Our natural starting point for any discussion on affordability was to ‘look at the books’. However, Scotland’s public sector is not currently required to report as a single nation. This means that there is no Scottish public sector balance sheet, making the starting point for the question of affordability more difficult to pinpoint.
Yet it is possible to use the disparate financial information that is already in the public domain and to be able to estimate what a Scottish balance sheet might look like. Using the audited financial statements of more than 100 public bodies in Scotland, we estimate that a devolved Scotland has assets of around £84bn and liabilities of around £100bn.
Although liabilities exceed assets, it is common for governments to have a ‘negative equity’ position. This is demonstrated by the UK balance sheet, which recognises assets of £1,263bn and liabilities of £2,893bn. So a devolved Scotland and the UK both report liabilities in excess of assets. Of course, the UK balance sheet includes all UK debt of around £1,000bn.
While the balance sheet position of a devolved Scotland can be estimated, the combination of a lack of Scotland-only financial information and the fact that negotiations will not commence until after the referendum means that an opening independent balance sheet cannot be accurately identified.
But what CIPFA’s paper shows is that the most significant impact on ‘Scotland’s public sector balance sheet’ is likely to come from two areas: Scotland’s share of the national debt, which could be up £120bn; and public sector pensions, which currently make up around £75bn of the devolved liabilities.
So on then to future financial sustainability in 2016/17 in what could be the first year of an independent Scotland. It is estimated that public spending will exceed tax revenue by around £4bn or 6%. Although there could be a rush to judgement about affordability, other matters such as future policy choices, North Sea Oil and the financial levers available to manage and hold reserves and to borrow money have to be factored in.
But it is also interesting to note the projected UK position for 2016/17. In that same year, the level of public spending in the UK is also expected be greater than tax revenue with spend of £753bn and tax revenue of £671bn.
As well as placing understandable financial information in the public domain, CIPFA’s paper identifies two important issues. Firstly, while devolution has led to significant policy divergence from the UK, the current UK financial framework does not enable the position in Scotland to be separately reported. Secondly, it seems that similar challenges in terms of financial sustainability will be faced whether by an independent Scotland or by the UK.
Don Peebles is head of CIPFA Scotland
