An immediate response to the Scottish Government’s paper on independence and the Scottish economy

An immediate response to the Scottish Government’s paper on independence and the Scottish economy

The Scottish Government has today published a blueprint for economic policy post-independence. This includes plans to move to a separate Scottish pound as soon as practical, to apply to re-join the EU, and to boost immigration to grow the workforce and tackle skills shortages.  

On the public finances, the Scottish Government says it would be committed to “sound public finances”, ensuring this through “fiscal rules informed by international best practice”, placing a limit on borrowing for day-to-day spending, and debt. However, the report does not discuss what achieving a sustainable fiscal position could mean for Scottish taxes or public spending, arguing that the economic and policy environment is too uncertain to do so.

It is true that the future path of the UK and Scotland’s public finances is currently even more uncertain than usual. But nevertheless, Scotland’s much higher levels of public spending and slightly lower levels of onshore tax revenues mean that it is highly likely an independent Scotland would need to make bigger cuts to public spending or bigger increases to taxes in the first decade following independence than the rest of the UK would need to (see here). In the longer-term, the sustainability of Scotland’s public finances – and its potential to reverse some of the spending cuts or tax rises – would depend on whether aims for faster productivity and economic growth were delivered.

Boosting immigration would boost the size of the economy – although the impact on productivity and GDP per person would be substantially lower. And re-joining the EU, while reducing trade barriers and boosting trade with the EU, would mean additional trade barriers with the rest of the UK, negatively affecting what are currently much bigger trade flows between Scotland and the rest of the UK. It is therefore far from certain that re-joining the EU would boost growth.

The Scottish Government also suggests setting up a ‘New Scotland Fund’, providing up to £20 billion of capital investment over the first decade of an independence to help boost growth, and enable reductions in carbon emissions. It is suggested that this fund would “reinvest oil and gas revenues”. However, with an independent Scotland’s budget likely in substantial deficit during its first few years, even including oil and gas revenues, this fund would in reality be financed by additional borrowing. 

David Phillips, an Associate Director at the Institute for Fiscal Studies said:

“The Scottish Government’s new paper on post-independence economic plans makes all the right noises on how the public finances would be managed, emphasising achieving fiscal sustainability. But, it skirts around what achieving sustainability would likely require in the first decade of an independent Scotland: bigger tax rises or spending cuts than the UK government will have to pursue.

This is because while high oil and gas prices means Scotland’s underlying budget deficit this year will be fairly close to that of the UK as a whole, this is likely to prove temporary: oil and gas prices are expected to fall back, and North Sea production is on a long-term downward trend. Scotland’s public finances are therefore expected to weaken relative to the rest of the UK again unless onshore economic growth could be boosted to grow revenues from income tax, VAT and the like.

That’s not impossible and the Scottish Government has rightly highlighted the UK’s poor productivity performance, including relative to many of the small northern European countries that it is suggested Scotland could emulate. However, boosting productivity and growth is far from certain and would be easier said than done. Experience from recent weeks suggests the markets may not look favourably on fiscal plans built on the uncertain hope of a substantial future boost to growth.”