A combination of raising taxes, cutting spending and continued borrowing would be required by an independent Scotland to manage its multi-billion pound deficit, according to newly published economic analysis.
Scotland will be running an £11 billion pound deficit by the time the UK comes close to balance, according to the latest Scottish Trends report outlining worsening economic conditions since the last referendum.
Analysis by economist John McLaren shows that Scotland’s deficit will still be minus 6.4 per cent of GDP when the UK’s deficit comes to minus one per cent of GDP in 2019/20. The difference amounts to around £1,700 per person.
The report blames the “virtual disappearance” of North Sea tax revenues since 2014 for the difficult economic outlook.
The report warns that the differential between the Scottish and UK deficits is unlikely to change under current tax and spend patterns “as neither the Scottish nor the UK governments expect North Sea revenues to return to anything like past peaks”.
With Nicola Sturgeon gearing up for a second independence referendum, Professor McLaren warned that higher taxes lower spending and continued borrowing would be required to manage the shortfall.
“The political challenge that remains is for pro independence parties to illustrate this themselves, something that, by and large, they avoided at the time of the first referendum,” the report said.
The analysis also suggested the argument for joining the euro was “stronger now” than it had been in 2014.
“With many economists predicting economic woes post Brexit, then sterling may not be the safest place to hitch your wagon. While the euro also has its on-going, unresolved, difficulties it may turn out to be a more reliable and stable currency than sterling in the long run. It may well be that the euro becomes the preferred choice, due to the ease of transition and the inheritance of a track record and the benefit of being part of such a large currency zone,” it said.
“The argument for not remaining in a sterling zone should be easier to make now, with Scotland being part of the EU economic union rather then the UK economic union in the future. However, the final choice may well depend on what happens to the euro and sterling (as a proxy for a separate Scottish currency) in the intervening period up to the second referendum.”
Professor McLaren also warned that the Scottish economy has suffered a “worrying slowdown” since the first independence referendum.
Over the last year of available data the Scottish economy has grown by 0.7 per cent while the UK economy has grown by 2.4 per cent.
“To be in such an economically weak position does not bode well for the YES campaign over the coming debate and this may be exacerbated if it affects Scottish spending levels in light of the new retained income tax power,” it said.
Professor McLaren said: “This analysis highlights the changes in economic circumstances since the 1st Scottish independence referendum. In particular, the seeming demise of the North Sea as a source of tax revenue and a Brexit vote in the UK that puts the validity of a post independence sterling zone in doubt. However, the pull of these two apparent negatives to the success of a YES vote in another referendum may not be enough to overcome the push of the UK’s decision to leave the EU and the prospect of a right of centre UK government for some time to come. Furthermore, any new offer of independence will be put to the electorate after a brief taste, sweet or bitter, of what leaving the EU might entail and this may well have a significant affect on the final outcome.”