TWO leading think-tanks have warned that Scotland would face an unpalatable choice of cuts to the military, public services or welfare to plug a gaping hole in its finances immediately after independence.
In separate reports, Glasgow University’s Centre for Public Policy and Regions and the Institute of Fiscal Studies, conclude that Scotland’s finances would be deeper in the red if the country dumped the current UK system of funding for one heavily reliant on North Sea oil taxes.
Scotland currently receives about £7 billion a year under the Barnett Formula, the CPPR says. The amount of money an independent Scotland would receive from North Sea oil, based on projections, would be less than that by 2015.
To plug the gap, the CPPR paper says “difficult and radical” savings could be made, such as scrapping the SNP’s plans to form a £2.5bn-a-year Scottish army, navy and RAF, and by reducing spending on overseas aid and foreign affairs.
Doing so could save £3bn, without affecting public services, allowing some oil money to be saved up for future generations.
The IFS report concludes that an independent Scotland “might well choose to cut public services or social security benefits rather than rely entirely on tax rises.”
A 1 per cent rise in income tax would only bring in £430 million, it says, but both groups note that, based on figures from the Office of Budget Responsibility (OBR), the total fiscal gap could hit £3.5bn, and then grow wider as oil receipts continue to drop off.
The CPPR paper comes after the SNP government published plans last month to create an oil fund after independence, by saving oil receipts that would flow into a new Scottish Treasury. The SNP said that OBR figures on oil projections were far lower than many others, and argued that the country could be in surplus.
But the CPPR concludes that the Scottish Government’s prognosis is “very optimistic”. More recent estimates suggest that even the OBR figures will be too high for the next two years, it adds.
Co-author Professor John McLaren said: “The last thing we are saying is that North Sea oil is a burden. What it is, is a substitute for something else that you get from being part of the UK.”
He added: “If you started this in the 80s then it [oil revenue] would have been a bonus. Looking forward at certain projections suggests that the reverse is likely to be true and will be increasingly so over a period of time.”
The CPPR paper concludes that, under the current Barnett Formula model, Scotland receives a net transfer from the UK of £7bn a year.
Under independence, this would effectively be replaced by getting all the North Sea Oil cash. But based on current projections by the OBR it says this is likely to be between £5bn and £6bn by 2015 and falling thereafter.
It concludes: “Looking forward, and based on the independent OBR’s central estimate of future UK North Sea revenues, Scotland could be facing a fiscal loss from independence.”
It adds: “In order for there to be no net loss to Scottish public finances, in moving from the current Barnett arrangements there would need to be an increase in production levels, an increases in prices, or both.”
Scottish Government estimates for North Sea oil production – which have claimed there would be a surplus – “have proven to be optimistic, as they are not based on the most up-to-date price and production projections,” the report adds.
The CPPR suggests that if Scottish ministers did want to fill the gap and save up oil money it could slash spending on defence from the estimated £3.5bn spent on defence in Scotland now to just £750m, similar to Irish levels.
However, the report adds that even if such cuts were manageable, the cash left over for an oil investment fund is “likely to be relatively small and nothing like the scale seen in Norway”.
The IFS paper backed up the CPPR’s work, saying an independent Scottish Govenment was likely to be £3.4bn deeper in the red by 2017, because of the decline in North Sea revenue.
It concludes that Scottish tax revenues are currently higher than the UK’s but warns that “most of this higher revenue would disappear by 2017-18 if offshore revenues decline in line with the OBR’s central forecast – although the future path of offshore revenues is highly uncertain and the Scottish Government is more optimistic”.
A Scottish Government spokesman said: “Both of these reports (by IFS and CPPR) confirm that Scotland is in a relatively stronger fiscal position with higher tax receipts per person than the rest of the UK as a whole, and the CPPR report confirms that we are now seeing record levels of investment in the North Sea.”
A spokesman for the YesScotland campaign said: “The debate is no longer about whether Scotland can afford to be independent and this is proven by showing that Scottish tax revenues per person are very similar to those in the UK as a whole.”
But Alistair Darling, the leader of the Better Together campaign, said: “The experts are clear that even with all the money we get from North Sea oil, an independent Scotland would still be in deficit.”
On the CPPR report, Scottish Secretary Alistair Carmichael said: “These academics from Glasgow confirm that that oil revenues will not fill the gap of funding that Scotland would lose by leaving the UK. An independent Scotland would also have to cut spending or raise taxes to pay for an oil fund.”
Pension paper ‘left out key information’
A Scottish Government paper on how pensions would be funded after independence omitted key information on the ageing of Scotland’s population, the country’s independent statistics authority has noted.
In a letter released last night, the chairman of the UK Statistics Authority, Sir Andrew Dilnot, concluded that the paper was a policy document that “selects statistical evidence” to support its case. He was responding to a complaint by the pro-UK Better Together campaign.
The letter says: “The paper selects statistical evidence that supports its central arguments, and in that respect is no different from many policy documents. However, we note the omission from the paper of analysis of published official projections showing that the dependency ratio for people of pension age is projected to be higher in Scotland than the UK average in the period to 2035.”
A Scottish Government spokesman said it treated its obligations to comply with the rules of the UKSA seriously and would continue to do so.