The Institute for Fiscal Studies (IFS) is the latest think-tank to look at the economic prospects of an independent Scotland.
It’s a heavyweight intervention that with a largely pessimistic message for Scottish nationalists.
What are the boffins saying?
We’ve been trying to keep tabs on this debate for the last few years, and the fundamentals questions remain the same.
Scotland’s future prosperity will depend on three unknowns: what will happen to North Sea oil and gas prices; how much of the UK’s debt a newly independent Scotland would shoulder; and how cheaply would the new country be able to borrow money.
That’s worth remembering when reading the IFS’s paper: nobody has a crystal ball. What the Institute has done is run a number of forecasts through its modelling software and laid out a number of potential scenarios.
As we’ve set out before in detail, there are big question marks over how much North Sea oil will bring in over the next few decades, and on how big a share of UK debt Scotland would take on.
There has been some suggestion from the Scottish National Party that there might be some possibility of wriggling out of negotiations on the question of debt altogether, but we think that is wrong.
A concensus does appears to be forming among economists that the most likely post-independence scenario is for Scotland to get about 90 per cent of the UK’s oil and gas reserves, based on international waters, and a per capita share of UK government debt, but none of this is a done deal.
The IFS has zeroed in on Scotland’s population, and the demographic differences with the rest of the UK.
The analysis makes for slightly grim reading, if you believe the official population projections from the Office for National Statistics.
Look at this table, and note all the minuses in the central ”Scotland” column showing expected population growth, compared to the equivalent in the rest of the UK.
The upshot is that Scotland’s population is only predicted to grow by 4.4 per cent by 2062 compared to 22.8 per cent for the rest of the country, thanks to lower birth rates, shorter life expectancy and lower immigration.
And all the population growth in Scotland comes from people aged 66 and over, people more likely to be drawing pensions rather than working and paying into the system. The result is chronically lower GDP north of the border.
So Scotland would have to raise taxes or cut public spending to avoid running up huge amounts of debt.
This is what the IFS thinks would happen to public sector net debt if the Scottish government did nothing:
How bad could things get?
The economists have come up with a range of different predictions based on different asssumptions about those big questions – oil, debt and borrowing costs.
They estimate that the UK as a whole need a permanent “fiscal tightening” (cutting spending, raising taxes, or both) of 0.8 per cent of national income to cut debt to 40 per cent of GDP by 2062.
For Scotland to achieve the same target, it will need to close a much bigger fiscal gap, ranging from 1.9 per cent of national income in the best case scenario to a frightening 6.3 per cent on the most pessimistic.
The best case scenario assumes that Scotland experiences higher inward migration to boost the population, manages to negotiate a much smaller share of debt and sees North Sea oil revenues hold up in the medium term.
The gap is still 1.9 per cent of GDP, and as the IFS says: “This is greater than the 0.8 per cent projected for the UK, and the risks are considerably on the downside.”
If you wanted to close the gap through cutting back on public services alone (rather than pensions and benefits), it would require cuts of 8 per cent, according to the IFS. Another alternative would be a hike in the basic rate of income tax…to the tune of 9 percentage points.
And the researchers note that “the majority of policies so far mooted by the current SNP government for after independence would cost, rather than save, money” – increasing aid spending, delaying state pension age increases, and reversing the so-called “bedroom tax”.
Plans to cut defence spending from £3.3bn to £2.5bn would only reduce overall spending by 0.5 per cent of GDP.
What do the nationalists say?
Scottish Finance Secretary John Swinney said today that an independent Scotland’s economy would have performed better historically, and Scotland is at risk from continued mismanagement if it stays part of the UK.
We’ll have to wait until tomorrow for a paper that will set out the detail of the Scottish government’s case.
Actually the IFS lends some support to the basic concept of an independent country having more flexibility to manage its affairs more efficiently: the think-tank notes that some taxes could be lower in the event of a “yes” vote because the whole tax system could be redesigned.
But if the nationalist strategy is to convince voters that the risks of staying in the Union outweigh those of an abrupt exit, the IFS may have left them with something of a mountain to climb today.
By Patrick Worrall
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