Scotland would have had to raise taxes or cut spending if it was wrestling with its estimated £10 billion budget deficit as an independent country, an economic think tank has calculated.
Independence could have given Holyrood powers to grow the economy and push up revenues – but the size of the deficit means in practice “spending cuts or tax rises would be needed”, the Institute for Fiscal Studies (IFS) said.
Scotland would have become independent on March 24 under the SNP’s plans but the oil price crash would have seen it starting out with a “fiscal gap” worth about £2,000 for every person in Scotland, the IFS said.
The current devolved settlement, where Holyrood gets most of its funding in a block grant from the UK Government, has “largely insulated” Scotland from the consequences of this large deficit.
Independence “clearly would have made it more difficult for an independent Scotland to manage its public finances”, the IFS said.
Scottish Government forecasts on oil revenues, which were “skewed to the upside”, and public finance ahead of the referendum now “look increasingly further away from what is now expected”.
IFS senior research economist David Phillips said: “In 2016-17, the ’fiscal gap’ is projected to be 6.5% of national income, which in cash terms is equivalent to about £10.6 billion, or around £2,000 per person in Scotland.
“That is the size of the Scottish deficit on top of its share of the overall UK deficit, which is £850 per person in the UK in the same year.”
He added: “If, as the Scottish Government have previously claimed, independence would allow policies to grow the Scottish economy more quickly, such faster growth would tend to push up revenues and reduce Scotland’s deficit.
“Independence would also, in principle, give the Scottish Government more freedom to tax and spend more or less, which could have implications for the Scottish budget deficit.
“In practice, however, if an independent Scotland faced a budget deficit anything like that in our projections, spending cuts or tax rises would be needed to put the public finances on a firmer footing.”
He continued: “Scotland is largely insulated from the consequences of the substantial gap between the government revenues it generates and the government expenditure undertaken in or on behalf of Scotland.
“This is because the Scottish Government gets most of its funding in the form of a block grant from the UK Government, and the UK Government uses revenues from across the UK to pay for non-
devolved items like social security benefits and defence.”
He went on: “The recent weakening in Scotland’s public finances – driven to a significant extent by falls in oil revenues and associated economic activity – clearly would have made it more
difficult for an independent Scotland to manage its public finances.
“The oil revenue and public finance forecasts produced by the Scottish Government in the run-up to the referendum also look increasingly further away from what is now expected.”
He noted the OBR got its oil projections wrong but said “the Scottish Government considers scenarios where the revenues come in higher than the OBR forecasts but does not consider scenarios where revenues come in less than the OBR forecasts.
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