Scottish independence: Think tank warns of budget squeeze

Britannia field, North Sea The IFS thinks the government of an independent Scotland would face a sharp decline in oil and gas revenues

An independent Scotland would face bigger pressures to cut spending or raise taxes than Britain currently faces if oil revenues fall as forecast, a think tank said.

The Institute for Fiscal Studies' (IFS) analysis of spending emphasises what it believes is higher spend per head in Scotland.

The Scottish government says Scotland is already paying its way and the oil tax projections are too pessimistic.

The findings are to be presented later.

They will be put forward at a conference on the economics of independence near Edinburgh.

Start Quote

Even with cuts to defence and aid spending, an independent Scotland may need to cut spending on other services or raise taxes by more than if it remained part of the UK”

End Quote David Phillips IFS

The IFS found spending in Scotland is 11% higher per head higher than for the UK as a whole, and spending on public services is 17% higher.

While the higher spend on health and education has narrowed in recent years, there remains a much higher spend per head on the smaller budget for economic development as well as social services, housing and transport.

The reckoning on the fiscal squeeze sees an independent Scotland as having to face similar pressures to the rest of the UK, requiring a £2.5bn cut in the two years from 2016 (at 2011-12 prices).

And as the Office for Budget Responsibility has forecast a sharp decline in oil and gas revenue, the IFS says a further cut would be required, of £3.4bn. In total, that's roughly 15% of public spending.

The think tank says Scottish Government plans to cut defence spending would help reduce the gap, but are far from meeting the scale of the challenge.

It says even if oil and gas revenue come in ahead of the OBR projection, it would be "ill-advised" of a Scottish government not to take similar measures to the UK Treasury, as it needs to build its credibility with financial markets.

North Sea

David Phillips, of the IFS and an author of the report, said an independent Scotland would have the scope to have lower spending on defence or foreign aid.

"However, it is unlikely that cuts here would allow Scotland to avoid cuts elsewhere, unless it were to increase taxes substantially," he said.

"Indeed, given the OBR's forecasts for declining North Sea revenues, even with cuts to defence and aid spending, an independent Scotland may need to cut spending on other services or raise taxes by more than if it remained part of the UK."

The Scottish government responded Scotland's fiscal position has been stronger than the UK, paying more tax per head than the rest of the UK for 32 years if oil and gas revenues are included.

It has also been critical of the OBR's assumptions about the future of those revenues, on both price and the amount being produced.

"Scotland more than pays its own way at the moment, and can more than afford to be a successful independent country, as the official figures show," said a spokesman.

"This report acknowledges that independence can provide opportunities to make savings, in areas such as defence, to reflect the policy choices of the Scottish government".

'Huge asset'

He continued: "North Sea oil and gas is a huge asset which generated an estimated £10.6 billion in tax revenues in 2011-12, 94% of the UK total. It will continue to make a significant contribution to the public finances of an independent Scotland."

A UK government spokesperson said: "This is another independent analysis which underlines why Scotland is better off in the United Kingdom.

"The IFS finds that in the case of independence Scotland would need to either substantially increase taxes or cut spending to meet the Scottish Government's stated plans.

"As the chancellor has said, oil and gas revenues are a huge asset, and within the United Kingdom we have the broad shoulders to maximise the benefits while also balancing the risks of this inherently volatile resource."

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