Analysis: Austerity is likely to continue long after the referendum

In the short term, the Scottish Government will be able to decide how to distribute the Barnett consequentials for the next four years. Some specific measures are also likely to be positive, such as the broadband “superconnected city” funding for Edinburgh, the upgrading of the sleeper rail service to London, as well as the more general credit-easing measures and deferred fuel duty increase.

However, it was in its longer-term implications that yesterday’s announcement will fire up Scottish political debate.

First, it is clear there will now be another two years of public sector austerity, beyond that already built into the spending round that ends in 2014-15. This means that the Scottish Government will need to start planning for further belt-tightening beyond the already harsh measures. This may result in bringing rejected measures back into play.

More immediately, the UK government announced its intentions to extend its public sector wage restrictions for another two years, albeit at a slightly less draconian 1 per cent average rise per year. This puts pressure on John Swinney to be similarly forthright in his pay rise expectations.

But the most intriguing aspect is that the austerity phase now extends well into the post-Scottish referendum period. If the referendum takes place in 2014 or 2015 it will do so at a time when the public sector’s balance sheet is still being sorted out. This could mean that a crucial aspect of the referendum debate ends up being how best to deal with this.

If there is a third option, devo-max, that includes full fiscal autonomy, then this, too, will mean that the public finances in these difficult times will be fully formed by a future Scottish Government.

Potential alternative answers to the question of how best to balance the budget, between higher/lower tax revenues and expenditure, and what spending and borrowing plans are best for growth, might be put forward by pro and anti independence parties.

One very important aspect of this debate, namely revenues from the North Sea, were significantly revised down by the OBR yesterday, due to expected lower prices and output. The oil and gas price aspect of this will remain highly volatile, but the production fall is more of a long-term worry.

The chances of the referendum taking place somewhere in a sunny upland now look forlorn. Indeed, if anything, the situation could be worse as the euro area and the United States fiscal troubles are more likely to worsen than improve versus the assumptions of “muddling through” inherent in the latest forecasts.

However, perhaps taking such a momentous decision is best done in austere times, as it will concentrate voters minds on determining how best to move forward.

• John McLaren is a professor at the Centre for Public Policy for Regions at Glasgow University.