IFS expresses concern over Scottish government’s analysis of public finances

The respected Institute for Fiscal Studies has cast doubts over the assumptions underlying the Scottish government’s assessment of public finances.

The respected Institute for Fiscal Studies has cast doubts over the assumptions underlying the Scottish government’s assessment of public finances should Scotland vote for independence in September.

The UK and Scottish governments have today published contradicting documents outlining the benefits, or otherwise, independence would bring to Scotland’s financial positions.

Seeking to explain the differences, the IFS has this afternoon produced an analysis, pointing to a potentially over optimistic assessment by SNP ministers of the likely deficit of an independent Scotland, underpinned by calculations on north sea oil revenue that is at odds with both the IFS and the Office for Budget Responsibility.

In its analysis, Scottigh ministers conclude that under independence, “Scotland’s deficit is projected to fall to 2.8 per cent of GDP in 2016-17” – greater than the 2.4 per cent deficit currently forecast by the OBR for the UK as a whole in that year. In March, however, the IFS put this figure at a far larger 5.2 per cent.

Pointing to the Scottish government’s decision not to use the same figures as those used by the IFS and OBR in calculating North Sea Oil revenues, Rowena Crawford and Gemma Tetlow from the IFS explained:

“The main point of disagreement is the different forecasts for revenues from North Sea oil and gas used. Our figures and the Treasury’s figures are based on the Office for Budget Responsibility’s projections. The Scottish government report instead uses their own – higher – forecasts for North Sea revenues. Their figures assume that Scotland will receive £6.9 billion (or 4.1 per cent of Scottish GDP) in tax revenues from offshore oil and gas production in 2016–17, rather than the £2.9 billion (1.7 per cent of GDP) forecast by the OBR.”

Highlighting the difficulties in knowing “exactly what offshore oil and gas revenues will be in future”, the IFS analysis warns that Scotland’s fiscal position would be “much more sensitive” to fluctuations in oil revenues than for the UK as a whole, which would, the IFS notes, “pose its own challenges to the management of the public finances in an independent Scotland”.

Even assuming that oil revenues come in as forecast by the Scottish government up to 2016-17, the IFS continues to urge caution about the sustainability of Scotland’s public finances if it opted for independence:

“Unfortunately the longer-run picture is not that simple. There are two important fiscal challenges that an independent Scotland would have to face in the longer run. First, an ageing population, which would tend to increase public spending (particularly on health care and pensions) and reduce some tax revenues. Second, as reserves of oil and gas are depleted over the long run, offshore revenues are likely to decline. These pressures will tend to increase public spending and reduce revenues, and therefore increase borrowing and debt, in the absence of other offsetting policies.

“In other words, even if the Scottish public finances were to look favourable in 2016–17, the long run picture may look very different. These challenges face not only Scotland but the UK as a whole. However, our previous work suggests that the issues (particularly the decline in revenues from offshore production) would be more acute for Scotland.”

Expressing concerns with the Scottish government’s analysis which provides scenarios suggesting that debt “could be on a decreasing, rather than increasing, path every year from 2018–19 onwards”, the IFS conclude:

“…whilst it may turn out to be the case that the Scottish economy does a great deal better after independence than it would as part of the UK, planning on this as a central assumption seems less than cautious.”

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