Scottish independence: ‘Fiscal black hole’ warning

A think tank has warned that an independent Scotland would have to raise taxes in order to gets its finances in order. Picture: PA

The London-based Institute of Fiscal Studies (IFS) also claims that Scotland would be in a far worse position than the rest of the UK, with a fiscal gap ranging between £3 and 10 billion, in the decades ahead as North Sea oil revenues dry up and the ageing population takes its toll.

The SNP government insists the scenario illustrates the future Scotland would face if it stayed within the UK – and that independence would bring the ability to make different decisions and allow the country’s economy to flourish.

Alex Salmond and John Swinney will publish an economic blueprint for the country post-independence which indicates that Scots have missed out on economic growth worth more than £900 per person since the 1970s as part of the UK.

But Nationalists were forced on to the back foot with the publication of yesterday’s IFS report just ten months before Scotland goes to the polls in the referendum. The report warned the coming decades would see a fledgling Scottish Government faced with drastic action to get public debt under control.

Co-author Gemma Tetlow, a programme director at the IFS, said: “An independent Scotland would face even tougher choices than those faced by the UK over the longer term. In 2011–12, higher public spending per person in Scotland was more than matched by higher revenues from activity in the North Sea.

“However, over the long term, revenues from the North Sea will probably decline and official population projections suggest the average age of the Scottish population will increase more rapidly than for the UK as a whole, putting greater upward pressure on many areas of public spending.

“As a result, to ensure long-run fiscal sustainability, an independent Scotland would need to cut public spending and/or increase other tax revenues more than would be required across the UK as a whole.”

The scale of the challenge over the next 50 years would depend on factors such as how much debt Scotland inherited from the UK, interest paid on the debt, the age of the population and potential changes in oil revenues and immigration rates.

An independent Scotland could expect to start life about £90bn in the red as it would inherit its historic share of UK national debt. Scotland already has an annual deficit – where spending outstrips the revenues raised through taxes – of about £7bn.

A range of scenarios in the report set out the action that would be needed to get debt down to manageable levels. The most optimistic sees North Sea reserves remain high – in line with Scottish Government forecasts – and high immigration helping boost productivity.

This would still leave a deficit of £3bn – equivalent to a 9 per cent hike in income tax or 8 per cent cut in public services. But if oil and gas receipts dwindle and productivity falls in line with a more pessimistic scenario, the tax hikes or cuts would have to be “double” this level to balance the books, Ms Tetlow warned.

The research uses a model of the UK’s and Scotland’s long-run public finances to project levels of public revenues and spending over the next 50 years, taking into account projected changes in the size and demographic structure of the population.

But Mr Swinney said the IFS report highlights the “broken Westminster system” and the opportunity to manage the economy differently under independence. “The whole point of independence is to equip Scotland with the competitive powers we need to make the most of our vast natural resources and human talent and to follow a better path from the current Westminster system which stifles growth and is responsible for the damaging economic decisions this report, and its projections, are based on,” he said.

“Scotland has strong financial and economic foundations, and even without a single penny from oil and gas, both output and tax revenues per head in Scotland are virtually the same as for the UK.

“Next year’s independence referendum will give people in Scotland a choice between staying with a broken Westminster system that has created one of the biggest gaps between rich and poor in the western world, which concentrates far too many jobs in London and the south-east of England, has accumulated vast amounts of debt and which neglects manufacturing and trade.”

Blair Jenkins, chief executive of the pro-independence Yes Scotland campaign, said: “Only a Yes vote can put in place the economic levers to produce policies suited to the needs and aspirations of our people and provide a change of course from the City of London economic model.”

Former Labour chancellor Alistair Darling, leader of the pro-UK Better Together campaign, said: “This sober and impartial analysis by the IFS leaves the SNP’s economic case for independence in tatters.”

He added: “The choice facing the people of Scotland is clear – believe Alex Salmond or believe the experts and the facts.”

Chief Secretary to the Treasury Danny Alexander said: “Even on the most optimistic scenario, an independent Scotland would require cuts almost two and a half times as deep than if they stayed in the UK. The Scottish Government has to confront this uncomfortable reality in their forthcoming white paper.”