IFS: Scotland faces £9.7bn spending gap under fiscal autonomy

22 Apr 15

Scotland’s public finances are set to remain in deficit until the end of the decade, meaning ‘full fiscal autonomy’ for Holyrood could lead to additional tax rises or spending cuts, the Institute for Fiscal Studies has said.

The think-tank further analysed the SNP’s manifesto proposal for full fiscal autonomy, through which the Scottish Parliament would fund its spending through its own tax revenues and borrowing – in the medium term.

It found that, in the current financial year, Scotland would have a net fiscal deficit of 8.6% of gross domestic product, higher than the UK’s 4% gap, amounting to a cash difference of £7.6bn. It projected that although UK borrowing will fall to 2% in 2016/17, 0.6% in 2017/18 turining to a surplus of 0.2% in 2018/19, Scotland’s deficit will remain. A spending gap of 6.8%, 5.4%, and 4.6% is forecast across these years, peaking at £9.7bn in cash terms in 2019/20.

The updated projection comes after the IFS first estimated the £7.6bn gap in 2015/16 earlier this month, which would have to be met by Holyrood in the event of full fiscal autonomy.

The follow-up report, published yesterday, stated that although the £7.6bn figure had only been for one year, the prospects for the finances did not improve to the end of the decade.

‘Indeed, if anything, given current spending and revenue forecasts, the gap would likely grow rather than shrink over the next few years. It would remain the case that full fiscal responsibility would likely entail substantial spending cuts or tax rises in Scotland.

‘While a big and sustained rebound in oil revenues or significantly higher growth in Scotland could mitigate this, there can be no presumption that either would occur.’

However, the report stated the Scottish government could grow the Scottish economy more quickly than that of the rest of the UK with additional powers, increasing tax revenues and shrinking the fiscal gap. But there was not guaranteed and assuming similar economic expansion as rest of the UK was the most useful comparison.

The analysis also added that the plans of the Smith Commission, which will devolve control of income tax, an assigned share of VAT and Air Passenger Duty, included a ‘no detriment’ principle that Scotland would not be made any worse off. It was unclear, however, whether the unionist parties would agree to this continuing to apply to the much greater devolution of full fiscal autonomy, which could mean the Scottish Parliament would be responsible for meeting any funding gaps.



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