Scottish independence: 'Fiscal gap would lead to spending cuts', says IFS

An independent Scotland would need to cut spending or raise taxes, said the IFS

An independent Scotland would need to cut spending or increase taxes for its finances to be sustainable in the long term, a think tank has warned.

The Institute for Fiscal Studies (IFS) said an independent Scotland would face a "fiscal gap" of 1.9% of national income, compared to 0.8% for the UK.

This would require significant spending cuts or tax rises, the report said.

Finance Secretary John Swinney said the analysis "underlines the case for an independent Scotland".

But Alistair Darling, leader of the pro-Union Better Together campaign, said the report left the SNP's economic case for independence "in tatters".

The report, entitled Financial Sustainability of an Independent Scotland, says the exact size of the challenge would depend on factors such as how much debt Scotland inherited from the UK, the interest it paid on the debt, the age of the population and potential changes in oil revenues and immigration rates.

The predictions were based on research funded by the Economic and Social Research Council.

Oil revenues

At present North Sea oil revenues more than make up for higher public spending per head of population in Scotland compared to the rest of the UK, the IFS says.

The think tank analysis said "even under the most optimistic scenario" bringing national debt down would require something like a 6% reduction in total public spending, a rise of 9% on the basic rate of income tax or a VAT rate of 28%.

Such measures would have to be taken over and above the tightening of public spending already planned by the UK government.

However, independence could also give Scotland an opportunity to create an "optimal tax system" which could lead to some taxes being lower than the UK as a whole, the IFS said.

The analysis also noted that under devolution Scotland already had different spending priorities than the UK as a whole, and said this would continue post-independence, meaning budgets could be more focused on local needs.

The independence referendum takes place on 18 September 2014, with voters in Scotland being asked the yes/no question: "Should Scotland be an independent country?"

Gemma Tetlow, one of the authors of the report, said an independent Scotland would face "even tougher choices" than the UK as a whole 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," she said.

"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."

Projections 'uncertain'

Mr Swinney will set out the economic case for Scotland leaving the UK during a visit to Dundee University on Tuesday.

He said the IFS report highlighted the "damaging" economic decisions taken by the UK government, and the need for economic independence in Scotland.

He added: "This report actually underlines the case for an independent Scotland with full control of its own economy and the ability to take decisions that can secure a stronger and more prosperous future for the country.

"It is no surprise that projections based on the UK's economic position show a long-term deficit when the OBR state that the UK's economic strategy is "unsustainable" and that the UK will run a fiscal deficit in each of the next 50 years.

"The IFS themselves admit their projections in this report are 'inherently uncertain and could evolve differently if Scotland were independent rather than part of the UK; in addition they could be substantially affected by the policies chosen by the government of an independent Scotland'.

"The whole point of independence is to equip Scotland with the competitive powers we need to make the most of our vast natural resources and human talent and to follow a better path from the current Westminster system which stifles growth and which is responsible for the damaging economic decisions which this report - and its projections - are based on."

'Big cuts'

Former Chancellor Alistair Darling, leader of the pro-Union Better Together campaign, said: "This sober and impartial analysis by the IFS leaves the SNP's economic case for independence in tatters.

"SNP ministers pretend that in an independent Scotland there would be more money to spend, but that notion has been comprehensively demolished by the analysis from this respected institution.

"Today's report is clear that an independent Scotland would need big cuts to things like pensions, benefits and the NHS or a big increase in tax.

"This report sets a major test for the SNP's White Paper. If the White Paper does not face up to the long-term consequences of leaving the UK, then it won't be worth the paper it is written on."

Blair Jenkins, chief executive of the pro-independence Yes Scotland campaign, said: "Only a yes vote can put in place the economic levers to produce policies best suited to the needs and aspirations of our people and provide a change of course from the City of London economic model.

"The urgency of independence to meet the demographic challenges ahead is further highlighted.

"It is extraordinary to see in black and white that UK policies are expected to result in a decline in the population of working age people in Scotland. That makes it clearer than ever before that Westminster is not working for Scotland - and we quite simply cannot afford to stay in the UK."

A spokesman for the UK government said the IFS report "confirmed that the Scottish government's promises for an independent Scotland are too good to be true".

He added: "Their independent analysis reveals that, even on the most optimistic scenario, an independent Scotland would require cuts almost two and a half times as deep than if they stayed in the UK."