Independent Scotland would face long term fiscal challenges

Scotland could replicate England
Published on Monday, 19 November 2012 09:47
Posted by Scott Buckler

The short run fiscal situation facing an independent Scotland would not look very dissimilar to that facing the UK as a whole, assuming that it would take a "geographical share" of North Sea oil and gas revenues

Public spending per head in Scotland is higher than that in the rest of the UK. Oil and gas apart, tax revenues per head are close to the UK average. If you add in a geographic share of oil and gas revenues then Scottish tax revenues would in recent years have been high enough to slightly more than offset the higher levels of public spending.

But over the longer run if, as seems likely, North Sea oil and gas revenues fall, an independent Scotland would face a bigger fiscal adjustment than the rest of the UK. If Scotland were to become independent in the second half of this decade it would do so following a long period of public spending cuts across the UK. Yet UK public sector net debt is projected still to be high by recent historical standards, still over 70% of GDP in 2017-18. When you take account of North Sea oil, GDP per head is somewhat higher in Scotland than in the UK as a whole. So if UK debt were shared on a per capita basis then an independent Scotland might inherit a slightly smaller debt to GDP ratio than that faced by the UK.

Even then debt would still likely be a good two thirds of GDP, much higher than the UK's level of debt in the years prior to the recent financial crisis and associated recession. A new Scottish government would need to put together a fiscal architecture which would set out a long term path to sustainability. These are among the main conclusions of a new report by IFS researchers, launched in Edinburgh today, which takes an initial look at some of the fiscal consequences of Scottish independence. This is the first output of a new project at IFS, funded by the Economic and Social Research Council (ESRC), looking at some of the fiscal choices that might face Scotland should it choose independence following the 2014 referendum.

Source: ©IFS

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