Scottish independence: IFS study warns of long-term fiscal challenges

Stewart Hosie and Alistair Darling on the finances of an independent Scotland

An independent Scotland would face long-term fiscal challenges, a new report has claimed.

The Institute for Fiscal Studies said in the short run the picture would not look dissimilar to the UK as a whole.

But it argued that over the longer term, Scotland would face a bigger fiscal adjustment than the rest of the UK if North Sea oil and gas revenues fall as expected.

The Scottish government said the study showed Scotland could pay its own way.

The institute's report said the short-term fiscal situation facing an independent Scotland would "not look very dissimilar" to that facing the UK as a whole - assuming it took a "geographical share" of North Sea oil and gas revenues.

It argued that public spending per head in Scotland was higher than that in the rest of the UK, while tax revenues per head - oil and gas apart - were close to the UK average.

The Institute for Fiscal Studies (IFS) said: "If you add in a geographic share of oil and gas revenues, then Scottish tax revenues would in recent years have been high enough to slightly more than offset the higher levels of public spending.

"But over the longer run if, as seems likely, North Sea oil and gas revenues fall, an independent Scotland would face a bigger fiscal adjustment than the rest of the UK."

The report said that if Scotland were to become independent in the second half of this decade, it would do so following a long period of public spending cuts across the UK.

The conclusions reached by the IFS - and others - require examination and debate.

They are that public spending is presently higher than in the UK as a whole; that, in calculating the financing of independence, the value of the North Sea presently trumps that; but that the oil and gas resources are volatile and declining, posing questions for the UK - but even more so in Scotland where the potential dependence upon such revenue is disproportionately high.

First Minister Alex Salmond and Scottish Finance Secretary John Swinney would give, broadly, two answers.

That oil supplies and thus revenues have been, wrongly, discounted in the past - and that an independent Scotland would be better placed to generate growth with an economic and fiscal programme tailored to Scotland's needs.

Those adhering to the Unionist cause tend to say that the evaporation of oil wealth is fixed and forecast - inevitable, in short - while the proposals to fill that gap, whenever it emerges, are more inchoate and imprecise.

But it added that UK public sector net debt was projected to be high by recent historical standards - still more than 70% of GDP in 2017-18.

The institute argued: "When you take account of North Sea oil, GDP per head is somewhat higher in Scotland than in the UK as a whole.

"So if UK debt were shared on a per capita basis then an independent Scotland might inherit a slightly smaller debt to GDP ratio than that faced by the UK.

"Even then debt would still likely be a good two thirds of GDP - much higher than the UK's level of debt in the years before the recent financial crisis and associated recession."

It added that a new Scottish government would need to put together a fiscal architecture which would "set out a long-term path to sustainability".

Finance Secretary John Swinney said: "The IFS report confirms that Scotland is more than able to pay our way with public spending offset by revenues raised in Scotland and that with the appropriate share of North Sea revenues Scotland's public finances have been stronger than the UK's in every year from 2006-07 to 2010-11 with an average fiscal deficit lower than the UK's since 2000.

"With independence Scotland will be able to face the difficult financial choices ahead from a stronger position than in the UK and use the full range of economic levers to support growth, boost revenues and deliver public services."

Alistair Darling, chair of the pro-Union Better Together campaign, said the report showed how exposed Scotland would be under independence.

He said: "An economy paid for at the petrol pump is not what Scotland wants or needs."

A Yes Scotland campaign spokesman said: "Independence will provide Scotland with the tools and levers required to meet our economic priorities in terms of boosting jobs, growth and revenue and, by doing so, further improve the fiscal strength of Scotland."

The report was part of an IFS project which will look at some of the fiscal choices that might face Scotland, should it choose independence following the 2014 referendum.

More on This Story

The BBC is not responsible for the content of external Internet sites

More Scotland politics stories

RSS

Features

BBC © 2014 The BBC is not responsible for the content of external sites. Read more.

This page is best viewed in an up-to-date web browser with style sheets (CSS) enabled. While you will be able to view the content of this page in your current browser, you will not be able to get the full visual experience. Please consider upgrading your browser software or enabling style sheets (CSS) if you are able to do so.