IFS Report Into Costs Of Independence

Claims spending cuts or tax increases would be needed to pay for Independence White Paper giveaways.

It's claimed an independent Scotland would face a budget deficit of more than £8 billion in its first year.

A report by the Institute for Fiscal Studies says a rise in oil revenues could help only in the short-term.

Experts claim that taxes would have to rise substantially if the Scottish Government goes ahead with proposals to cut defence spending by £400 million and to abolish the new transferable tax allowance for married couples.

Other findings of the report include:

Scotland's public finances

· In 2012/13, total public spending for the benefit of Scotland was £1,257 (11.5%) per person higher than the average for the UK as a whole Allocating a geographic share of North Sea oil and gas revenues to Scotland, total tax revenues were just £789 higher per person. Onshore revenues were £157 per person lower than the average for the UK. 

· As a result, Scotland is estimated to have had a deficit 1% of GDP higher than the UK as a whole. This is a change from 2011/12 when Scotland’s net fiscal deficit was smaller than for the UK. This relative decline was due to a fall in volatile North Sea revenues.

· The OBR forecasts that revenues from offshore oil and gas production will decline further over the next few years. If this turns out to be the case, Scotland's fiscal position would not strengthen as quickly as the UK's is forecast to. If the government of an independent Scotland were to implement spending cuts pencilled in by George Osborne in full it could still face a deficit of 2.9% of GDP in 2018-19, while the UK as whole is forecast to achieve a net fiscal surplus of 0.2% of GDP.

· This is a slightly weaker picture for Scotland than in our forecast earlier this year, reflecting downward revisions to the OBR’s forecasts for the UK's oil and gas revenues, and to the Scottish share of these revenues.

· Scottish public finances could come in better than this if some of the oil scenarios outlined recently by the Scottish government come to pass. They would also be helped if Scotland were to inherit less than a population share of outstanding debt. But these scenarios cannot be relied upon and would in any case still leave further fiscal consolidation needed not least because of the longer-term challenges of population-ageing and the eventual decline of North Sea revenues.

The Independence White Paper

· The White Paper outlined specific tax raising measures and spending cuts that would together save just under £500 million a year. On top of this there is an aspiration to raise a further £235 million through, as yet unspecified, measures to remove exemptions and reduce tax avoidance.

· The spending increases and tax cuts described in the White Paper are more numerous and more costly, around £1.2 billion a year in the short term and potentially considerably more in the longer term if full aspirations for childcare and state pensions are met (although some policies may have dynamic behavioural effects that mean that they could partly pay for themselves).

· Delaying the increase of the state pension age from 66 to 67 due to take effect between 2026 and 2028 would increase spending on the state pension and other benefits by around £550 million per year in today's terms. The fact that Scots live slightly less long on average than people in the rest of the UK does not make this more affordable. Its cost will be determined by the fraction of people reaching 66 in the late 2020s and early 2030s. At 1.3% of the population that is forecast to be slightly higher in Scotland than in the rest of the UK (1.2%),

· The biggest increase in spending is planned for childcare: £100 million per year in the first year, rising to an estimated £1.2 billion a year under longer term aspirations. This is intended to help parents of young children enter the labour market and increase their working hours. Some of the costs could be offset by increased labour supply, though there is surprisingly little strong evidence of childcare provision having a big effect on parental labour supply. The Scottish government’s analysis of the policy, which includes scenarios that would entail more people entering work than there are non-working mothers directly affected by the policy, probably doesn’t shed much useful light on the likely fiscal consequences.

· The White Paper rightly identifies the UK tax system as overly complex and inefficient. Its general aspirations for simplicity, transparency, and equity are admirable if uncontroversial. A number of specific policies may also make sense – a lower rate of corporation tax is likely to prove attractive to a small open economy such as an independent Scotland, for instance. But it is possible that the UK might respond by lowering its own corporate tax rate, so such competitive tax policies also carry risks.

"One thing that the Scottish Government, the UK Government and the UK opposition have in common is the lack of detail they have provided as to how they would finish the necessary fiscal repair job from April 2016. Our calculations suggest that an independent Scotland could expect to be running a deficit of around 5% of GDP in 2016–17, which would be larger than that facing the UK as a whole, and would necessitate tax rises or spending cuts.” said David Phillips, a senior research economist at the Institute for Fiscal Studies and one of the authors of the reports.

"While the White Paper contains some measures that could help balance the books, the spending increases and tax cuts pledged or hinted at are substantially larger. In a difficult fiscal context, such giveaways make the job of restoring the public finances to health more difficult, and would require bigger spending cuts or tax rises in other areas. Thus, underlying the seemingly attractive policies outlined in the White Paper are difficult, unmentioned, decisions for other public services, benefits and taxes."

A Scottish Government spokesman said:
 
"Scotland is one of the wealthiest countries in the world, more prosperous per head than France, Japan and the UK, but we need the powers of independence to enable that wealth to be shared and to build a fairer society.
 
"An independent Scotland's finances in 2016-17 will be similar to, or stronger than, both the UK and the G7 industrialised countries as a whole, and even on the IFS's projections, Scotland’s public finance balance sheet in the first year of independence will be healthier than the UK's was in the most recent financial year.
 
"However, the IFS's forecasts of Scotland’s public finances to 2018-19 are based on the OBR's projections for North Sea revenue which assume that oil production remains static and that prices fall in the coming years.  This is despite recent record levels of investment in the industry which analysis by Oil and Gas UK suggests will feed through to higher production in future years. 
 
"And as the IFS report notes, Scottish taxpayers paid £789 more per head than the UK in 2012-13, demonstrating the huge contribution that Scottish taxpayers make to the UK economy, with more tax per head paid by Scotland than the rest of the UK for every one of the last 33 years.
 
"But it is only with the powers of independence that Scotland can unlock its full economic potential, allowing us to improve Scotland's productivity growth, employment rate and population growth, which could boost revenues by an additional £5 billion a year after 13 years."