Independence: Economists criticise both sides

CONFLICTING claims that Scots could be more than £1,000 better or worse off after independence have been heavily criticised by leading economists who say they are based on “highly contestable” assumptions.

Danny Alexander, Chief Secretary to the Treasury, welcomed the report's findings. Picture: TSPL
Danny Alexander, Chief Secretary to the Treasury, welcomed the report's findings. Picture: TSPL

Scotland could find itself anywhere from £1.9 billion in the black to £10.8bn in debt after a Yes vote – depending on the level of volatile oil prices and interest payments on its debts.

There is “much uncertainty” over the looming state of public finances and the claims from either side of the debate have left Scots baffled ahead of next month’s historic vote, according to a report by the Fiscal Affairs Scotland think tank.

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“Voters have been understandably confused over the claims and counter-claims on how much better or worse off Scotland could be under independence,” said co-author Professor Jo Armstrong.

“One of the key insights in this analysis is that the £1,000 better or worse off-type claims relate to very different things and are based on highly contestable assumptions.”

The Scottish Government has claimed Scots would be £1,000 better off a year after a Yes vote as the economy prospers, but the Coalition Government has claimed people would benefit from staying in the UK by £1,400 per person.

The claims hinge on the state of Scotland’s public finances – and the shortfall between public spending on things like schools and hospitals and taxes used to pay for them.

Scotland already runs a major deficit as part of the UK which reached £12bn last year (2012/13) as oil revenues tumbled. It had been £8.5bn the year before.

Today’s report, Scotland’s Fiscal Balance Position: Better or Worse Off Under Independence Than as Part of the UK? finds that the UK and Scottish governments are broadly in agreement that Scotland would be in the red by about £6bn in 2016/17, the first year of independence.

But this excludes the North Sea and volatile oil and gas prices as well as the higher interest payments an independent Scotland could face on its debt because it is a fledgling nation with no credit history.

Two possible scenarios are set out in the paper. The “narrow” range would give Scotland a deficit anywhere between £8.6bn and £5.1bn – leaving Scots on average between £916 and £266 worse off.

It is based on “central” assumptions of the UK Government and the Office for Budget Responsibility (OBR) at the higher end and the Scottish Government’s white paper at the lower end.

The “wider” range of estimates suggests Scotland’s finances could be facing anything from a deficit of £10.8bn up to being £1.9bn in credit – meaning Scots would be £1,033 better off or £1,324 poorer.

The lower figure is based on the more pessimistic UK Government and OBR estimates while the higher is from the latest Scottish Government estimates of higher oil prices, which leaves Scotland in surplus.

Professor John McLaren, the report’s other co-author, said: “No-one can estimate with certainty whether Scotland would have a better or worse fiscal position post-independence.”

Prof McLaren added: “There is much uncertainty around, for example, future North Sea revenues and the share of UK debt that Scotland would inherit, which means that less likely, but still possible, outcomes exist where Scotland could end up better or worse off.”

The SNP’s longer-term claim that Scots would be better off by £5bn by 2030 – the equivalent of £1,000 per person – hinges on growing the economy.

The £1,400 “worse off” claim from Westminster depends on the rate of interest Scotland would face on its debt and the cost of setting up a new state which could also vary widely.

Danny Alexander, Chief Secretary to the Treasury, last night welcomed the findings, saying: “This independent analysis demonstrates again that the Scottish Government’s fantasy figures do not stand up to scrutiny. A separate Scotland means higher taxes and less money to spend on vital public services.

“Together in the UK, we can share resources and pool risks. We are better off together with the UK’s broad shoulders.”

A Scottish Government spokeswoman pointed to the report’s warning that the Barnett formula, which determines Scotland’s share of UK funding, would have to change even after a No vote, which would have a “material impact on Scotland’s longer-term fiscal position.”

The SNP claims this would see Scotland’s annual budget cut by £4bn a year.

The spokeswoman said: “Scotland is a successful and prosperous country. Our GDP per head is greater than in countries such as France, Japan and the UK itself, and independence will provide the opportunity to invest in our economy, grow our businesses and boost revenues by £5bn by 2030.”

She added: “This report contains no new figures. However, it does confirm that even on the UK Government’s worst-case scenario, an independent Scotland would start life in a healthier financial position than we were as part of the UK in the last year.”