Lower population means more funding for Scotland if it stays within the UK, says influential think tank

Scotland’s declining population would see more funding per person if the country remains part of the United Kingdom and funding arrangements for devolved budgets remain the same, a leading think tank has said.

It follows analysis published this week by the Scottish Fiscal Commission which projects the population of Scotland is set to fall by 16 per cent, or around 900,000, around the size of Edinburgh and the Lothians, over then next 50 years.

This is likely to impact economic growth, with the Scottish economy growing around 0.5 per cent less per year in aggregate than that of the UK.

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However, the Institute of Fiscal Studies said the existing financial arrangement for funding the devolved government in Edinburgh would be “insulated” by the change in the population.

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David Phillips, an associate director at the IFS, said slower population growth would mean around 2.5 per cent more funding per person per year by the early 2030s, rising to around 8.5 per cent more by the early 2070s.

This would be around double the proportion of the Scottish budget which is spent on the police and fire services.

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David Phillips, an associate director at the Institute for Fiscal Studies said: “Most people would probably assume that a large projected fall in the Scottish population over the coming decades would damage the Scottish Government’s finances by undermining revenues.

"However, under current constitutional and funding arrangements, that’s not true: a smaller population means more funding per person from the UK government.

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The IFS has said a declining population could be a benefit to Scotland's budget if it remains within the UK

“This has important implications for the policy trade-offs the Scottish Government faces as it seeks to both support the economy and improve the long-term sustainability of its budget.

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"Successfully attracting more migrants and boosting birth rates would benefit the economy, but may make managing the government’s budget harder rather than easier as funding per person from the UK government is cut.”

Mr Phillips said this scenario would “stand[s] in contrast” to the potential economic situation for the Scottish Government if Scotland was an independent country.

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This would be due to a need to boost the birth rate and immigration in order to help the economic growth of the newly independent state, which would need to stem population decline to help address “significant fiscal challenges” it would face.

He added: “As part of the UK, the Scottish Government’s budget is protected from and even benefits from falls in Scotland’s population, even as the wider economy likely suffers.

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"As an independent country, Scotland’s public finances would instead almost certainly be stronger if population decline could be stemmed.

"Indeed, boosting birth rates and immigration would provide some help in addressing the significant fiscal challenges an independent Scotland would face unless it could boost economic growth.”

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Liz Smith, finance spokesperson for the Scottish Conservatives, said the SFC and IFS’s projections were “sharp reminders” of the structural imbalances within the Scottish economy, as well as the “very strong financial benefit” of the union.

She added: “Scotland’s population decline needs to be reversed and that means making Scotland a much more attractive place in which to live and work.

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"That will not happen if we remain the highest-taxed part of the UK, and have a Scottish Government that is obsessed with trying to deliver independence rather than focussed on improving productivity, economic growth and the delivery of our public services.”

A Scottish Government spokesperson said: “The projections for Scotland’s falling population over the next 50 years starkly illustrate the social and economic costs of the Scottish Government not being in control of immigration policy – something that has been hugely exacerbated by Brexit.

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“Independence will give Scotland the full range of economic and other policy tools to take decisions based on our own needs, and will allow us the chance to replicate the success of many neighbouring countries which are more prosperous, productive and fairer than the UK.”

The sixth and final episode of the brand new limited series podcast, How to be an independent country: Scotland’s Choices, is out now.

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It is available wherever you get your podcasts, including Apple Podcasts and Spotify.

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