Scottish independence: Scotland faces ‘stark choices’ if oil revenues fall away, report warns

INDEPENDENCE could leave Scotland facing tougher choices on public spending than the rest of the UK in the longer term, a leading think tank warns today.

• Study suggests choices facing an independent Scotland on spending may be starker than rest of UK on public spending

• Higher public spending may not be sustainable as oil and gas revenues fluctuate, according to fiscal body

A study from the Institute for Fiscal Studies (IFS) concludes that if North Sea oil and gas revenues were allocated on a geographical basis, then in the short term the “outlook for an independent Scotland looks as if it might be no more uncomfortable than that for the UK as a whole”.

But the report highlights the higher spending on public services north of the Border and the volatility of oil and gas revenues, and warns: “In the longer term, the choices may be starker.”

The report also warns that Scotland’s higher spend on frontline public services than the UK as a whole “may not be sustainable” under independence.

The study, examining the fiscal consequences for Scotland if it were to leave the UK, has been welcomed by both sides in the debate ahead of the independence referendum.

Former chancellor Alistair Darling, the leader of the pro-Union Better Together campaign, said the report showed “just how exposed” an independent Scotland would be in financing public services.

But SNP finance minister John Swinney said the report bolstered the economic case for independence and suggested Scotland would fare as well as the rest of UK if it was to be handed a share of North Sea oil revenues based on the nation’s geography.

The IFS says that public spending in Scotland is about £1,200 higher per 
person than in the UK as a whole, at about £11,800 north of the Border in 2010-11, compared with £10,600.

Spending on public services in 
Scotland is “especially high on personal social services for older people, probably reflecting, in part, the Scottish Government’s policy of free personal care for the elderly”.

The other area where the report says there is a clear difference in spending since devolution is university and college education, which it says is about £70 a head more in Scotland than in the UK as whole.

Scotland’s economic future would be brighter if North Sea oil and gas revenues were allocated on a geographical basis, as the IFS claims its public finances “look to have been somewhat stronger than the UK’s in recent years”.

However, the report warns that if Scotland was to receive oil and gas revenues based on its population rather than geography, the situation would leave the country’s economy in a much weaker position in the long term, due to public spending outstripping tax revenues.

The report says this “results in a position for Scottish public finances which has been weaker than that of the UK as a whole for the last 30 years, with the gap widening over time from about 2 per cent of GDP in the early 1980s to about 5-7 per cent by the mid-2000s”.

The report states: “Without 
oil and gas revenues or, equivalently, assigning them on a population basis, there has been a bigger gap between spending and tax receipts in Scotland in recent years than in the UK as a whole.”

An independent Scotland, in common with all countries, would “face constraints and would have to make, sometimes uncomfortable, choices” one of the report’s author David Phillips, predicts.

However, Mr Phillips says: “Independence would provide Scotland with an opportunity to set its own fiscal course” with the transfer of economic powers from Westminster to Holyrood.

He says Scotland might inherit a slightly smaller debt-to-GDP ratio than that faced by the UK, but that this would still run to two thirds of GDP, much higher than the UK’s level of debt in the years before the recession.

The report says that “in the longer run, the loss of these revenues would lead to tougher choices than those faced by the UK as a whole”.

Mr Swinney insisted that Scotland contributed proportionately more to UK tax revenue than it received in public spending, which he said the authors of the report accepted.

He said: “It is clear from this report that the UK’s economy is struggling, the Chancellor’s plans to reduce the debt will fail to hit their target and that post 2014, the UK will continue to face the stark choice of further cuts or tax hikes.

“The IFS report confirms that Scotland is more than able to pay our way, with public spending offset by revenues raised in Scotland, and that with the appropriate share of North Sea 
revenues, Scotland’s public finances have been stronger than the UK’s in every year from 2006-7 to 2010-11.

“With independence, Scotland will be able to face the difficult financial choices ahead from a stronger position than in the UK and use the full range of economic levers to support growth, boost revenues and deliver public services.”

But Mr Darling said the findings undermined the economic case for independence.

“The report sets out, in stark terms, just how exposed we would be under independence to one revenue stream,” he said.

“North Sea oil is notoriously volatile and, according to the report, the only way that we would even come close to balancing the books in future would be by ensuring that what oil we have left is sold at the highest possible price.

“An economy paid for at the petrol pump is not what Scotland wants or needs.

“The report drives a train through the SNP’s claims that Scots would pay less tax, but receive higher public services than we do now under independence. There are difficult economic times ahead. Independence continues to be shown to be an inadequate response.”

Scottish Conservative deputy leader Jackson Carlaw claimed that the IFS report was a blow to the Yes campaign.

He said: “It’s getting harder for Alex Salmond – supposedly a skilled economist – to ignore these findings. The longer he does, the more people will lose confidence that he is serious about an independent Scotland’s chances in the world.”

A Yes Scotland spokesman said: “Scotland consistently contributes more in taxation to the UK Treasury than it receives back in spending. This report confirms that Scotland is in a stronger financial position than the UK as a whole.”