Without significant fiscal tightening, an independent Scotland would not be overly financially sustainable, says the Institute for Fiscal Studies (IFS). In a report published today, the IFS said that "even under the most optimistic scenario", the country would be left with a £3bn black whole in its public finances - 1.9 per cent of national income. (Release)
"Further fiscal tightening… on top of that already required by the UK government", said the think tank, would be needed "in order to put Scotland's long-term public finances onto a sustainable footing". To raise 1.9 per cent of national income from tax revenues, the Scottish government would need to hike tax or make bigger cuts: tax rises "of the order of around eight percentage points to the basic rate of income tax or seven percentage points to the standard rate of VAT" would be needed. "Alternatively, reducing total public spending by 1.9 per cent of national income would require a six per cent reduction in spending, or an eight per cent reduction to public service spending if benefit spending were not reduced."
These long-run fiscal pressures should "form an important part" of discussions on Scottish taxation if the Scottish people vote 'yes' to independence next year, it added.
In 2011-12, 8.4 per cent of the UK population lived in Scotland but 9.9 per cent of UK GDP was produced there (this is assuming that Scotland accounted for a geographic share of North Sea production). However, the IFS goes on to say that revenues from the North Sea will go down from 0.4 per cent of national income to 0.2 per cent and, because Scotland is so reliant on those, the decline "is sufficient to more than offset growth in other revenues in Scotland as a share of national income and thus… suggests that revenues in Scotland will decline as a share of national income between 2012–13 and 2017–18 (from 34.6 per cent... to 33.2 per cent)."
The think tank predicts that, without policy action, and assuming that Scotland takes on a population share of accumulated UK debt at the point of independence, "public sector net debt in Scotland would increase every year as a share of national income, and exceed 100 per cent... by 2033–34." It estimates that Scotland would need a permanent tax increase or spending cut, or both, equal to 4.1 per cent of Scottish national income (that's £6bn in today's terms). This would need to be implemented in 2021-22, in order to put public sector debt on course to reach 40 per cent of national income by 2062-63.
The IFS uses a model of the UK's and Scotland's long-run public finances to forecast levels of public revenues and spending over the next 50 years. The model takes into account predicted changes in the size and demographic structure of the population.