IFS: Independent Scotland Will Face Tough Fiscal Challenges

The Scottish government will face difficult choices in tax and spending if the country's voters decide to leave the union in the September 2014 referendum.

In consideration of public revenues and spending over the next 50 years in the UK and Scotland, an independent Scotland would face considerable fiscal pressures in the event of independence, according to the Institute for Fiscal Studies (IFS).

The IFS report, entitled Fiscal sustainability of an independent Scotland, said policymakers would be forced to public spending by as much as 8% or increase taxes, while oil revenues are likely to decline in the future.

"An independent Scotland would face even tougher choices than those faced by the UK over the longer term. In 2011-12, higher public spending per person in Scotland was more than matched by higher revenues from activity in the North Sea," said Gemma Tetlow, programme director at the IFS and an author of the report.

However, Scotland could face challenges in the form of an ageing population, shortfalls in productivity, declining North Sea oil revenues, higher borrowing costs and rising levels of public debt.

"Over the long-term, revenues from the North Sea will probably decline and official population projections suggest that the average age of the Scottish population will increase more rapidly than for the UK as a whole, putting greater upward pressure on many areas of public spending.

"As a result, to ensure long-run fiscal sustainability, an independent Scotland would need to cut public spending and/or increase other tax revenues more than would be required across the UK as a whole," said Tetlow.

North Sea Oil Revenues

The IFS stated that a striking vulnerability of a separated Scotland's plans was its dependence on North Sea oil revenues.

In 2012-13, revenues from the North Sea oil made up 18.6% of Scottish revenues, while these only accounted for 2.0% for the UK as a whole.

North Sea oil are volatile and are expected to decline in the long term, said IFS.

Transfer of the offshore oil industry's productivity to other sectors based inland would be a gargantuan challenge to the Scottish government if it was to avoid debts associated with drops in productivity.

"Lower productivity growth does feed through into higher borrowing over time because lower GDP growth means that spending on interest payments on the stock of existing debt does not decline as rapidly as a share of national income over time as it does in our basic model. Assuming 1.7% productivity growth in Scotland instead of 2.2% suggests that borrowing would reach 18.4% of national income in 2062-63 rather than 15.6%," IFS said.

Demographics and Borrowing

The report said that Scotland's elderly population was increasingly at a greater rate than the rest of Britain, which would result in a proportionate increase in health spending costs for the Scottish government.

This could be countered by an influx of young and motivated workers said the report and the IFS called this their optimistic scenario for migration levels in an independent Scotland.

An independent Scotland would be subject to higher borrowing costs compared to the rest of the UK.

Scotland's credit history would be subject to greater scrutiny by international creditors, compared with the rest of the UK, according to IFS.

"Thus far, the set of policies that the current Scottish government has suggested for an independent Scotland would serve to increase public borrowing, not reduce it," the report concluded.