Think Tank report warns of spending cuts and tax hikes
An independent Scotland would have to cut spending or increase taxes for its finances to be sustainable in the long-term, a leading think tank has warned. The Institute for Fiscal Studies (IFS) said Scotland would face a ‘fiscal gap’ of 1.9% of national income, more than double that of the rest of the UK (0.8%).
The report says that significant spending cuts or tax increases would be necessary to balance the books.
Better Together campaigners say the report leaves the economic argument for independence ‘in tatters’ but Scottish Finance Secretary John Swinney believes the report actually underlines the case for an independent Scotland.
The 69 page ‘Fiscal sustainability of an independent Scotland’ (attached below) concludes:
‘An independent Scotland would have the freedom to make its own decisions about spending priorities and the appropriate design of the tax system, but it would be constrained by the necessity to deliver a significant cut in spending and/or increase in tax revenues in order to put its public finances in a sustainable long-term position’.‘
Speaking after the publication of the report earlier today, 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.”
Not so, say supporters of independence. Commenting on the IFS report, Mr Swinney said: “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 effected 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.
“Scotland has strong financial and economic foundations, and even without a single penny from oil and gas, both output and tax revenues per head in Scotland are virtually the same as for the UK.
“Next year’s independence referendum will give people in Scotland a choice between staying with a broken Westminster system that has created one of the biggest gaps between rich and poor in the western world, which concentrates far too many jobs in London and the South-East of England, has accumulated vast amounts of debt and which neglects manufacturing and trade – or using the full tools of independence to rebalance the economy, improve equality and support public services.
“Between 1977 and 2007, smaller independent European countries similar to Scotland grew their economies faster than ours, and if we had matched those rates that greater output would now be the equivalent of around £4.5 billion.
“Tomorrow the Scottish Government will publish detailed analysis of the economic security, growth and job opportunities that come with the powers of independence and by taking Scotland’s future into Scotland’s hands.”
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From ‘The Point’:
“Firstly, those assumptions in the IFS report. There are six assumptions made in this report which are highly questionable, to say the least 1) that an independent Scotland will continue with the same disastrous political and economic trajectory as the current Westminster coalition 2) that we will inherit our population share of the UK debt, rather than a historical share based on the higher level of revenue contribution we have made over the last thirty years ( a matter for negotiation) 3) that an independent Scotland, bouyed by significant oil and gas revenues would either need or wish to pay down inherited debt at the same rate as Westminster. 4) That oil and gas revenues will simply be used up in general public spending rather than invested creatively to prepare for a high tech, re-industrialised post oil economy. 5) That the most pessimistic projections for oil and gas revenues (the Westminster government’s OBR projections, rather than the much more optimistic projections of the Department for Climate Change or the oil and gas industry itself, are the ones that should be used. 6) – and this is a beauty – that it is somehow not automatic that Scotland would ‘receive’ it’s geographic share of oil and gas revenues once independent but only a share ‘based on population’ i.e. that in defiance of common sense and international law we would still hand over the bulk of our oil and gas revenues to rUK!!
Even with these bonkers assumptions in place to ensure that the final arithmetic gives results to make Unionists everywhere cream their breeks, the author of the report felt compelled today on the increasingly Goebellian BBC to say that an independent Scotland was in no way a barmy idea and that indeed an independent Scotland could ‘thrive’.
In essence, what the report really says is that a low wage, low job security, service sector based economy (exactly what they UK has delivered for us in the last thirty-five years) would be difficult for an independent Scotland to sustain. However we don’t want to sustain that kind of economy. We want to build a high wage, high skilled, high end economy based on production of real wealth.”
The Yes and No sides are basing Scotland’s financial figures on GERs. Which I suppose is fair enough given that it is done on a ‘best estimate’ basis and is ‘kite marked’ for accuracy. But I really want to see a debate delving a bit deeper. There is so much not included in those figures.
All the tax and national insurance on public sector wages goes back to Westminster – that’s not included in GERs and it is multi billions. Crown estates, shipping fees and the underspend on the TV licence are smaller but run to hundreds of millions that is not included in GERs. Corporation tax for companies based in England but operating in Scotland is not included. A share of oil production is included but a share of the North Sea Service sector isn’t and that is worth almost as much as the oil itself. Scotland’s GDP is comparable with the rest of the UK without oil. With oil it is around 20% higher.
Add to this the fact that Scotland pays a share of projects that are deemed to be in the ‘national interest’ like the Olympics, London Cross -rail, London sewerage and expenditure for London governance – and the number of government jobs that are based there that would return to Scotland. You have the massive underspend on the military which runs to billions over the last 10 years.
Scotland’s last deficit according to GERs was around £6.5 billion. If Scotland was independent we would not have a deficit we would have a very large surplus.
I want to see this debated by politicians – but as long as the debates are using GERs and not delving into the things I’ve mentioned above – both sides will be wrong.