Nicola Sturgeon relies on Bank of England amid record deficit

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Scotland's First Minister Nicola Sturgeon Bank of England deficit
Scotland's First Minister Nicola Sturgeon Bank of England deficit

Nicola Sturgeon relied on the heft of the Bank of England to run up a record deficit during the pandemic, according to a new report that highlights the challenges Scotland would face in an emergency as an independent state.

Britain’s record peacetime deficit of 15.2pc of GDP was dwarfed by Scotland’s implied borrowing of 23.5pc, said David Phillips at the Institute of Fiscal Studies.

The credibility of the Old Lady of Threadneedle Street in global markets was crucial to financing such a shortfall. Scotland's deficit was the biggest since devolution in 1998.

In a report published by the Economics Observatory he said: “Interest rates would at some point rise without a credible plan to reduce the budget deficit. And one reason why interest rates in the UK and other developed countries have remained so low is that central banks have, in effect, bought much of the newly issued debt.

“Because an independent Scotland would take some time to set up and establish its own central bank and currency, this option would not be immediately available.”

This would pose a particularly acute challenge to an independent Scotland as it already typically spends and borrows more per person than the UK as a whole, said the report.

Even as the UK Government’s finances are projected to recover to a deficit of 1.5pc of GDP by 2026-27, spending in Scotland will run ahead of tax receipts to the tune of 7.5pc of GDP according to Mr Phillips.

That is equivalent to £640 per person in the UK overall, compared to £2,975 per head in Scotland.

As a result English workers can expect to keep subsidising spending in the north indefinitely, as was the case before Covid struck.

This is driven by public spending in Scotland which averaged £1,550, or 12.3pc, more per person than the UK average in the five years before the pandemic, even as revenues were £325, or 2.8pc, lower.

Services including healthcare, social care and education - particularly for early years and universities - receive more cash in Scotland via the devolved administration.

It gave Scotland an implied pre-Covid deficit of 9.2pc of GDP versus the 3.1pc gap in the UK’s finances.

Mr Philips said: “This pattern looks set to persist and means that if Scotland were to become independent, it would likely be faced with the task of dealing with a large budget deficit, making spending cuts or tax increases necessary in its first five to ten years to get it down to more manageable levels."

“The longer-term outlook would depend crucially on how the post-independence Scottish economy performed – faster growth, while easier to promise than deliver, could in principle more than offset the loss of fiscal transfers from the rest of the UK.”

A spokesman for the Scottish Government said an independent state would have more powers to control its spending.

“The GERS figures which this paper is based on reflect Scotland’s position within the UK – not independence – under which 40pc of spending and 70pc of revenue income is reserved to the UK Government."

“With independence Scotland would have the power to make choices best suited to Scotland’s interests, with different budgetary results – and the paper itself notes that smaller independent countries ‘tend to run smaller budget deficits than larger countries’ like the UK.”

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