Ministers in Edinburgh have also accepted the Bank of England in London would still have a controlling veto over public spending after independence under the SNP’s plans to keep the pound.
The emergence of the report, which was presented to the Scottish Cabinet by finance secretary John Swinney, comes as a former economic adviser to First Minister Alex Salmond warns in today’s Scotsman that such an arrangement would be little different to the existing “block grant” Scotland gets from Westminster.
Military spending is also unlikely to rise much above the current level Scotland enjoys, despite SNP complaints that Scotland does not get a fair deal, the report reveals. Opposition parties immediately accused SNP ministers of saying “one thing in private and another in public”, but the Scottish Government insists the contents of the report have been overtaken by events.
The paper, which was presented to the SNP Cabinet last year, emerged as finance secretary John Swinney yesterday hailed official figures which indicate that Scotland’s public finances are in better shape than the UK as a whole.
But the Cabinet paper reveals the Scottish Government anticipates that in four years Scotland will have a “marginally larger net deficit than the UK”.
This means a bigger gap between public spending and the taxes raised to fund them.
Expected North Sea revenues are set to fall in light of recently revised estimates, the report says, and this will hit the nation’s prospects after independence.
“Given the relative importance of North Sea revenues to Scotland’s public finances, these downwards revisions have resulted in a deterioration in the outlook for Scotland’s public finances,” it states.
The country’s expected net deficit has more than doubled from £12 billion to £28bn as a result of these revisions, the paper indicates.
“This high level of volatility creates considerable uncertainty in projecting forward Scotland’s fiscal position,” the paper adds. “This would, on present assumptions about onshore tax revenues, require some downward revision in current spending.”
This is likely to hit services in Scotland, with a warning that “these pressures could reduce the resources available to provide additional public services”.
The paper says Scotland’s armed forces would have a “much lower budget” than its population share and the SNP has said this would not be any more than £2.5bn.
The report accepts that Scotland’s budget after independence would be subject to conditions and any government at Holyrood would “have to ensure that it remained in line with any agreement on monetary union”.
Professor John Kay, a former member of Mr Salmond’s Council of Economic Advisers, writes in The Scotsman today that it is “hard to imagine RUK [the rest of the UK] countenancing either deficit or debt levels in Scotland significantly in excess of those for the UK.”
The SNP has also pledged to protect Scotland from the worst of the coalition’s welfare cuts, such as the bedroom tax. But the recent recession has seen the UK Treasury “absorb the risk” of soaring benefits, the leaked paper says, and Scotland’s ageing population will add to welfare problems after independence.
The cost of setting up the institutions of the new state will be “significant”, including £600 million a year for new tax body Revenue Scotland. This is double the current payments to HMRC.
But the Scottish Government insists that the paper has been “overtaken by events” with oil revenues having surged on the global market to $115 a barrel. Initial estimates from the Office for Budget Responsibility put oil prices at less than $100 in the years ahead, but other forecasters have put it at $130.
The SNP added that over the seven years from 2010/11 to 2016/17, Scotland would have been better off than the UK to the tune of £16.8bn.
Former chancellor Alistair Darling, who now heads the pro-Union Better Together campaign, said the paper was a “hammer blow” to the SNP’s credibility.
Labour leader Johann Lamont said: “John Swinney and his colleagues know the truth about the consequences of Scotland leaving the UK – in public they deny them.”