Scottish government contests Institute for Fiscal Studies report that predicts 'significant additional fiscal tightening'
An independent Scotland would face decades of higher taxes and deeper spending cuts than the rest of the UK because of its heavy reliance on dwindling North Sea oil, the Institute for Fiscal Studies (IFS) has predicted.
The economics thinktank warned that Scotland would face a "significant" and "very difficult" task in trying to cut its debts and absorb the impact of lower oil revenues if voters backed independence next September.
Even using the most optimistic forecasts of oil revenues from the Scottish government and the Office of Budget Responsibility, declining oil production would leave it facing income tax rises of at least 9% or a 28% rate of VAT – higher than that of Greece – or enduring billions of pounds of spending cuts for the next 40 years.
As a result, Scotland would have to very quickly start cutting spending or raising taxes to put the economy on a sustainable footing and confront the challenge of paying off its share of the UK's debt, something the Scottish government had so far failed to discuss.
If not, Scotland would eventually face a fiscal gap – the difference between what it raises and what it needs for public services and cutting the debt – of 1.9% of gross national income, compared with 0.8% for the UK.
The IFS admitted its predictions had a series of caveats but said those cuts or tax rises were on top of the cuts planned by the UK government. If Scotland continued public spending at its current rate, its national debt would become more than 100% of national income by 2032. IFS economists added that under their more downbeat central model, that gap would jump to 4.1% of Scotland's national income – equivalent to an 18p rise in the basic rate of income tax or a VAT rate of 36%, nearly double today's rate.
The institute's long-term forecasts in Fiscal Sustainability of an Independent Scotland, the most detailed analysis yet of Scotland's future economic prospects, led to a fresh verbal battle over independence.
The forecast was published just over a week before Alex Salmond publishes his government's key document on independence, a white paper which is set to spell out the case for independence and the SNP's plans for sweeping reforms of the economy and public policy.
Alistair Darling, chairman of the pro-UK Better Together campaign, said the IFS had left "the SNP's economic case for independence in tatters".
Danny Alexander, chief secretary to the Treasury in the coalition, said the paper posed a series of major challenges which needed to be confronted in the Scottish government's white paper. It proved that Salmond's promises on independence were "too good to be true".
John Swinney, the Scottish finance secretary, said the IFS paper underlined the case for independence by pointing out that different economic policies after a yes vote could see the situation significantly change. His government's analysis had shown that with independence at an earlier stage, Scotland could have matched the growth rates of other small countries which would have made Scotland's population £900 a head better off.
Without independence, he said Scotland would remain tied to the UK's weak, unequal and unstable economy and remain simply a "branch economy" for south-east England. "We are doing OK but we could do so much better," Swinney said. "Under the status quo we have witnessed the decline of major manufacturing industries, a continual trade deficit with the rest of the world and ever rising levels of debt that are holding the economy back.
"With independence we will have the full range of economic tools we need to target all of our efforts and resources [at] creating a more prosperous Scotland."
IFS staff insisted their modelling was robust but said all their figures were subject to a number of caveats, chiefly on whether Scotland wanted to follow the UK government's target of cutting national debt to 40% of GDP over the next 50 years.
Those variables also included how much debt it inherited from the UK, the interest rates Scotland had to pay international lenders, its oil revenues in future, Scotland's more rapidly ageing population and on future immigration rates.
It pointed out that Scotland's balance of payments are currently very healthy, thanks for the time being to high oil revenues. Independence would also allow Scotland to introduce a more efficient tax system, attract far more immigration to boost productivity and adopt policies closer to Scotland's economic needs.
Paul Johnson, director of the IFS, said he was surprised about how very low Scotland's immigration rates were compared with some parts of the UK. Increasing that would boost the economy.
But Scotland also faced tougher challenges paying off its share of the UK's debt, since international markets were likely to impose higher interest rates on a new state with a heavy reliance on a volatile commodity like oil, adding billions of pounds to the total bill.
In that case, Johnson said, Scotland would be better off swapping some of its oil with the UK in exchange for a lower share of the UK's debt – a politically awkward challenge for Salmond.
Scottish independenceScottish politicsScotlandThinktanksEconomic policyEconomicsScottish National party (SNP)Severin Carrelltheguardian.com © 2013 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds |
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