Scotland's full fiscal challenges

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That £7.6bn figure won't go away. Until now, that is. It now has companion numbers. And they're even bigger.

So £9.7bn may now become the big number that gets batted around the final two weeks of the election campaign - and beyond.

The £7.6bn figure, you may remember, came from the Institute for Fiscal Studies. It was a calculation of how much deficit Scotland would be running if it had control over its own finances.

That represents more than twice the share of national output that the UK deficit should reach this year.

The IFS was using Office for Budget Responsibility (OBR) projections of the course of the squeeze on public spending, which concluded the UK could reach a deficit this financial year of 4% of GDP. The IFS reckoned the Scottish deficit could be 8.6% of GDP.

By coincidence, the European Union's Eurostat division has published comparable calendar year figures for the EU.

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Image caption According to European Union statistics, Cyprus had the largest deficit in 2014

While four out of 28 countries were in surplus in 2014 (including Germany and Denmark), it shows Cyprus had the largest deficit in 2014, at 8.8% of GDP. Spain was next with 5.8%.

And then came the UK, with a 5.7% deficit last year, tied with Croatia. To be clear, this is not a good league table in which to appear that high up.

But more to the point in Scotland, it shows that an 8.6% deficit would be second top in Europe last year.

And given it covers this financial year, while eurozone members are under instructions to reduce deficits, it could have meant an independent, or fiscally autonomous, Scotland would now have Europe's highest deficit.

'Irrelevant snapshot'

What the IFS has now done is respond to the criticism that the £7.6bn figure was merely a "snapshot" and "irrelevant" by publishing forecasts showing four snapshots for the next four years of the next Westminster parliament.

And here are the numbers:

2016-17: £8.2bn

2017-18: £8.5bn

2018-19: 8.9bn

2019-20: 9.7bn

That's not the size of the deficit. That's how much bigger the deficit could be than the UK number.

Those are in cash terms, so it's worth pointing out that these numbers represent a falling share of GDP, or output: -6.8%, -5.4%, -4.6%, -4.6%. That's arguably a more meaningful measure of deficit and debt. What matters is how big a share of output it is, and therefore how affordable it is to service.

Indeed, that's the number the SNP wishes to emphasise in its response to the IFS paper. The party is stressing the length of time for a transition to "full fiscal responsibility", and meanwhile portrays its opponents' emphasis on these deficit projections as "constantly talking down Scotland's financial abilities".

Heading for surplus

While the Scottish deficit would fall over that time to 4.6%, the eurozone countries have to get their deficits below 3% of GDP, agreed as the safe maximum in normal times.

So what about the UK over that period? Isn't it the problem here, in that it has been running these huge deficits, by European standards?

This analysis follows the plan from the OBR, which follows the taxation and spending assumptions of the coalition government when George Osborne set out the Budget last month.

So this assumes the austerity squeeze which the SNP, among others, is criticising.

That OBR profile is for the deficit falling fast for the UK as a whole, and going into surplus in the final two years of the parliament.

Starting with the current year, the UK deficit starts at -4.0% and for the next four years, it looks like: -2.0%, -0.6%, +0.2% and +0.3% in 2019-20.

Other numbers are available, if you want a second opinion. They were already published by Fiscal Affairs Scotland, following the Budget last month.

They show the Scottish deficit falling from £14.2bn this year (including the UK element) to £11.3bn next year and down to £8.1bn in 2019-20.

During that time, the UK deficit would move into surplus, so the comparable figures with the IFS are £8bn this year (instead of £7.6bn) rising more gradually to £8.7bn by 2019-20.

Roughly in line with the IFS figures, the deficit as a share of GDP would fall from 8.7% to 4.3%.

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Image caption The oil and price and forecast for oil tax take have changed

What's changed? Well, mainly the oil price and the forecast for oil tax take.

The latter depends on both the price and the production levels, which have been falling. It assumes that Scotland would continue to have significantly higher spending per head than the UK as a whole. The 9.2% share is maintaining throughout this model.

And while Nicola Sturgeon has emphasised that onshore (non-oil) tax takings are due to rise by 15% over the parliament, demonstrating the underlying strength of the non-oil economy. That is an assumption from Fiscal Affairs Scotland based on the same rate of tax revenue growth as the whole of the UK.

But what if Scotland's economy could be coaxed into growing faster, boosting tax revenues and reducing the share of output represented by deficit spending?

The IFS says that's possible, but "easier to promise than deliver". It says that, to close the deficit gap to UK levels in the next parliament, the Scottish economy would have to double its growth rate. Even to close the gap in 10 to 15 years would require "a step change" in growth.

The SNP argues that should be possible, using those levers of economic power, to grow productivity, grow exports and grow business investment. Again, that's possible, but it's not clear why all these things would get such a boost, when they are all being pushed under current arrangements, and stagnating British productivity remains a puzzle to economists.

Barnett under pressure

All this is hypothetical, except for being in the SNP manifesto. And that is now being taken very seriously, as a guide to what the next occupant of 10 Downing Street may find himself doing.

But what about the reforms that are already under way? The Smith Commission last autumn set out new powers for Holyrood, with cross-party agreement. They're now grinding their way through Holyrood's finance committee, before the newly-elected/re-elected MPs at Westminster can get stuck into them.

And they've already hit choppy waters. Jim Cuthbert, a respected cruncher of public finance accounts, coming at them with a nationalist perspective, has set out for MSPs his big doubts about the workability of joint control over income tax.

In short, his problem is that a change to income tax rates in the UK needs to be co-ordinated with the portion of income tax controlled at Holyrood, unless there are to be perverse effects.

A more fundamental challenge to the Smith Commission's findings comes from the Royal Society of Edinburgh.

Image copyright Royal Society of Edinburgh

This eminent grouping of Scottish academics says the changes are being rushed through without adequate consultation, and undermines the chances of reaching "an enduring settlement".

It is telling Holyrood's finance committee that there needs to be clear recognition of risks and opportunities, clear fiscal rules, better mechanisms for Holyrood and Westminster to regulate their relationship, independent data and forecasting in Scotland.

They're also saying the Barnett Formula needs reconsidered. This is tricky during an election campaign, as all the parties are committed to retaining it.

But the Royal Society boffins emphasise its shortcomings, particularly at a time such big changes are being enacted.

This probably isn't the best time to get politicians' attention, to get them to think again, or to change their minds. And of course, on 8 May, the Holyrood campaign starts.

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