AN INDEPENDENT Scotland may have to introduce tax hikes or spending cuts as the fledgling state battles to establish itself on international money markets, new research has found.
The country is likely to operate a Budget deficit after a yes vote, but it would face a lower credit rating and higher interest rates on its borrowing, according to a report by the Scotland Institute think tank today.
The SNP Government has insisted that taxes will not need to go up after a Yes vote and Scotland would be in a stronger fiscal position compared with the rest of the UK.
But the country is expected to inherit up to £120 billion of the UK’s massive national debt and with no credit history, an independent Scotland would face higher borrowing costs, today report suggests. However, Scotland would have a lower debt to GDP ratio than the UK.
“In the long term, changing demographics, a reduction in oil and gas production, and significant exposure to international finance through the financial sector all endanger its future fiscal performance and stability,” today’s report states.
“These factors would exaggerate the impact that an independent Scotland’s likely debt burden would have on its credit rating and cost of borrowing.”
This suggests any prudent future independent Scottish Government would need to try and reduce its debt through a reduction in public spending, an increase in taxation, or a combination of the two.
Today’s report is the latest think tank report suggesting Scotland would face a tightening of its public finances, with the Institute of Fiscal Studies (IFS) and National Institute Economic and Social Research (NIESR) issuing similar warnings.
Dr Azeem Ibrahim, the Institute’s Executive Chairman said: “A future Scottish Government’s options on spending are likely to end up being more limited than they are even now, and Scottish voters should be wary of SNP promises on certain issues such as greater public spending in the future.”
The Institute interviewed a wide range of experts in economics, politics and finance, including the leading global credit agencies, to establish the likely outcome of negotiations over Scotland’s share of UK debt and its implications.