Independent Scotland would have 'substantial' fiscal deficit, new report warns

Breaking away from the UK would leave Scotland with a sizeable fiscal deficit that would necessitate difficult policy choices, according to new analysis.

The Institute for Government (IfG) calculations show that if Scotland became an independent country, it would spark an economic shock which would require massive cuts to public spending.

The think-tank’s report follows similar conclusions by the Institute for Fiscal Studies on Monday, which also predicted a heavy deficit burden and “difficult choices” for an independent Scotland, although Nicola Sturgeon has dismissed the findings as only “reflective of Scotland’s fiscal position in the UK” and not as a separate country.

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Scottish Conservative economy spokesman Maurice Golden said the IfG report "lays bare the chilling economic reality of ripping Scotland out of the UK”.

A second report has said that an independent Scotland would have a substantial fiscal deficit.

But SNP finance secretary Kate Forbes defended the prospects of an independent Scotland, saying the nation’s “abundant resources combined with the economic powers of independence” would see it emulate the success of Denmark and Norway “which are richer per head than the UK”.

According to the IfG report, which also looks at the economic prospects of independence for Wales and the reunification of Ireland, even before the Covid pandemic Scotland ran a deficit of more than 7 per cent of gross domestic product (GDP) – well over twice the level required for those hoping to join the European Union and far higher than the English deficit in 2018/19 of 0.3 per cent of GDP.

As a result, while every person in England on average benefited from public spending worth £91 more than the taxes they paid, in Scotland the figure was £2,543.

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“The Fiscal Position of Scotland, Wales and Northern Ireland” paper examines the difference between the revenues raised from economic activity in each UK nation and the amount of public spending done for the benefit of each.

As part of the UK, it says Scotland, Wales and Northern Ireland currently benefit from a redistribution of resources from England.

It states that while an independent Scotland could pursue its own policies to boost economic growth, incomes and tax revenues, this would not happen quickly enough to avoid difficult tax and spending choices and how to maintain Scotland’s higher spending per person on public services would, says the report, “be an early, burning question”.

Gemma Tetlow, IfG chief economist and report author, said: “Any advocates for breaking away from the UK must address the reality of the nations’ current fiscal imbalances and the difficult policy choices these would necessitate after secession. The larger the deficit that they have, the harder the case for breaking away from the union becomes.”

The report states while there are “many reasons why the people of Scotland or Wales might want to seek independence from the UK, and why the people of Northern Ireland might want to be part of a united Ireland … one cost of doing so would be that they would no longer be able to benefit from the redistribution of resources that currently takes place across the UK”.

“These transfers have been facilitated in some years by the UK Government’s ability to borrow large amounts of money at very low interest rates,” the report said. “An independent Scotland or Wales would be unlikely to be able to borrow as cheaply as the UK currently can.

“Smaller countries often pay a debt interest premium over bigger countries because their bond markets are less liquid. A new country would also not have the track record with markets and, depending on its currency arrangements, might not have a central bank that could act as a credible lender of last resort.”

The think-tank adds there is “uncertainty and disagreement” about how large a deficit Scotland would have if it left the UK as well as disagreement about the outcome of any exit negotiations with the remainder of the UK,.

The report points to three main areas of conflict – how much, if any, historic UK debt would be taken on by the exiting nation, defence and overseas spending, and future payments from the rest of the UK, for instance on supporting North Sea decommissioning costs since the UK as a whole benefited from oil and gas taxes and pensions.

It continues: "These settlements would need to be negotiated with the rest of the UK on secession. Even allowing for these adjustments, however, all three of the smaller UK nations would face a sizeable fiscal deficit if they were to break away from the rest of the UK.

"This would be particularly true for Wales and Northern Ireland, but Scotland’s fiscal position is also markedly weaker now than it was when the last independence referendum was held, in 2014, largely because of the decline in output and revenues from the North Sea.”

And while the report states that “in principle, both Scotland and Wales could function as independent countries”, it adds: “There would be difficult fiscal adjustments to be made in the years after secession to address the fiscal imbalances that each currently faces.

"An independent Scotland could pursue different economic policies, which may help to boost economic growth, incomes and tax revenues in future. However, this would be unlikely to happen quickly enough to avoid the necessity for difficult tax and spending choices after secession."

To reduce the fiscal deficit, the report says Scotland would have to implement a combination of three things – cut spending, raise taxes and increase economic growth.

However, on growth the report says: “The history of efforts by past UK governments and others around the world suggests that governments have only limited ability to boost growth and that it takes a long time for the benefits to materialise. In the short term, the uncertainty and disruption caused by breaking away from an established fiscal, monetary and trading union could drag on growth.”

Ultimately, the report says: “Any decision about seceding from the union must grapple with the reality of the current fiscal position of the UK’s constituent nations.”

Mr Golden said the IfG report showed “the Nationalists are willing to inflict untold damage on families and business”.

He said: “The SNP would no longer be able to afford policies such as free prescriptions and free tuition as Scotland would face spending cuts and tax rises the likes of which we have never experienced.

"When all focus should be on recovery and rebuilding, this is reckless beyond belief. Deep down, Sturgeon must know the devastation this would cause.”

Scottish Liberal Democrat Treasury spokesperson Christine Jardine said: "This is the second report in recent days to warn that an independent Scotland would be under huge economic pressure.

"Over the past few days we've seen nationalists threaten to ditch the pound and claim that borders create jobs. They couldn't be trusted with a piggy bank, never mind the tens of billions in trade that Scotland does with the rest of the UK.”

Shadow Scotland secretary Ian Murray stressed the report revealed that independence would “unleash austerity on a scale the Tories can only dream of”.

“Economists are already warning that Scotland is headed for a jobs crisis,” he said.

“It is reckless beyond imagining to call for a referendum during our long recovery."

But Ms Forbes said: "Every country in the world is dealing with exceptional public finance pressures as we recover from the pandemic. The UK last week saw its deficit rise to the highest level since 1946, while its national debt now stands at more than £2 trillion.

“The Scottish Government must balance its budget by law – it cannot overspend through borrowing as other governments can.

"The key issue is for Scotland to have all the powers needed to manage our own recovery.”

Scottish Greens co-leader Patrick Harvie said: "This modelling forecasts what Scotland might look like as a miniature version of the United Kingdom, but the Scottish Greens have been clear that independence is an opportunity to do things differently.

"Our manifesto makes a commitment to tax wealth, not just income, which has even been raised by the IMF as a solution.”

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