New calculations – based on forecasts from the Office for Budget Responsibility (OBR) – suggest that an independent Scotland would face a budget deficit of 5.5% of GDP (£8.6 billion in today’s terms) in its first year of independence were it to inherit a population share of the UK’s national debt. This would not be sustainable for any prolonged period. Any upside surprise on oil revenues would help, for a while, but as recent experience demonstrates, these revenues can also disappoint. And in the longer term, the eventual decline of oil revenues would likely prove a much more acute problem for an independent Scotland than it would for the UK. Thus, while independence would bring more choice about how to deliver further fiscal consolidation beyond April 2016, it is unlikely to mean that further austerity could be avoided.
The Scottish government’s White Paper suggests a £400 million cut to defence spending, and the abolition of the new transferable tax allowance for married couples and the ‘shares for rights’ scheme. But, the spending increases and tax cuts planned or hinted at are more numerous and more costly. Implementing such a net giveaway would require bigger cuts to other public services or benefits, or increases to other taxes.
These are among the main conclusions of two new IFS reports, funded by the Economic and Social Research Council (ESRC), which update our medium-term forecasts for an independent Scotland’s public finances and consider the Independence White Paper in the context of these forecasts. Other findings of the report include: