Independent Scotland faces bigger budget squeeze than rest of UK

An independent Scotland would face bigger pressures than the UK to either cut spending or increase taxes as a result of falling north sea oil revenue, the Institute for Fiscal Studies has warned.

An independent Scotland would face bigger pressures than the UK to either cut spending or increase taxes as a result of falling north sea oil revenue, the Institute for Fiscal Studies has warned.

The research, conducted by the respected think tank on government spending in Scotland, repeatedly emphasised the higher spending per head in Scotland than the rest of the UK. Spending is 11 per cent higher north of the border than the rest of the union.

Based on the UK government’s pencilled in public service spending cuts of 1.6 per cent of GP in 2016-17 and 2017-18, if Scotland introduces similar levels of cuts this would amount of £2.5 billion in today’s prices in 2011–12.

The report adds, however, that:

“Given public services spending of £42.0 billion in the same year, a cut of around 6.0 per cent would be required to deliver such a fiscal tightening through cuts to public services alone.”

But factoring in the Office for Budget Responsibility’s projections for declining North Sea oil revenue raises the prospects of much greater cuts than those faced in the UK. The IFS report observes:

“Under the OBR’s projections for North Sea revenues, Scotland’s budget deficit may be 2.2% of GDP further into the red than that of the UK as a whole in 2017–18. To fill this hole would require a further £3.4 billion of tax rises or spending cuts, on top of the £2.5 billion required as part of the plans set out by the UK government.”

Based on 2011-12 spending levels this would, the IFS conclude, “amount to a cut of almost 15 per cent.”

The report warns that it would be “ill advised” for the Scottish government to follow strictly the UK treasury’s proposal’s, even if oil revenues come in ahead of the OBR’s projects. It explains:

“An independent Scotland might instead want to maintain a stronger fiscal position than the UK, both in order to gain credibility in the financial markets and as preparation for the longer-term fiscal challenges of an ageing population and the eventual inevitable decline of North Sea revenues.”

David Phillips, a senior research economist at the IFS and an author of the report, said:

“Spending on public services is substantially higher per person in Scotland than in the UK as a whole.

“This is driven by higher spending on many areas like transport, housing, economic development and social services. The Scottish government has used the existing powers under devolution to set different priorities for spending in Scotland.

“Looking ahead, independence would give Scotland the power to set spending on those areas that are currently the responsibility of the UK government like defence and foreign aid.

“These are areas on which the UK is a relatively high spender and there could be scope for Scotland to make substantial cuts to these areas. However, it is unlikely that cuts here would allow Scotland to avoid cuts elsewhere, unless it were to increase taxes substantially.”

He continued:

“Indeed, given the OBR’s forecasts for declining North Sea revenues, even with cuts to defence and aid spending, an independent Scotland may need to cut spending on other services or raise taxes by more than if it remained part of the UK.”

The findings of the report, to be formally published today at a conference on the economics of independence, will be a blow to the Yes Scotland campaign and will do little to allay the fears of the 45 per cent of Scots who, according to polling by TNS BMRB, believe the Scottish economy would fare worse if the country opts for independence.

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