Analysis: Unpalatable warning should be considered

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Picture: Getty
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THE Institute for Fiscal Studies often upsets governments by not agreeing with their policy prescriptions or with their view of the future.

So yesterday’s analysis of Scotland’s fiscal prospects by the IFS may have been unwelcome. The difference between this analysis and those that have gone before is that the issue at stake for Scotland is constitutional change rather than electoral advantage. Hence the need to ensure the analysis uses the best available data in the most authoritative fashion.

The IFS analysis rests on two principal datasets: Government Expenditure and Revenue in Scotland, prepared by the Scottish Government, and the Public Expenditure Statistical Analyses, prepared by HM Treasury. Neither is perfect: approximations have to be made. But both datasets are broadly consistent with each other and other data sources.

The IFS analysis of Scotland’s fiscal prospects is similar to that used by the Office of Budget Responsibility (OBR) to forecast the UK’s long-term tax and spending prospects. It is based on a large number of assumptions about how tax revenues and spending will evolve. For the UK as a whole, the most recent OBR fiscal sustainability report argues that as a result of demographic change, budget deficits will tend to widen to potentially unsustainable levels unless fiscal policy is tightened. The IFS analysis suggests an independent Scotland would have two additional problems: the declining value of North Sea oil revenues – more important to Scotland than to the UK as a whole – and the fact Scotland’s old-age dependency ratio will increase faster than the UK’s. Hence, while Scotland starts from a deficit similar to the UK’s, the IFS suggests an independent Scotland’s “fiscal gap” would be much larger.

IFS warnings independence carries fiscal risks as well as opportunities may not be palatable to the Scottish Government, but they have to be given serious consideration.

• David Bell is Professor of Economics at Stirling University.