An independent Scotland would need to raise taxes or cut spending to a greater extent than the UK in order to reduce its budget deficit, a think tank has said.
The Institute for Fiscal Studies (IFS) has published its response to the latest data on Scotland’s deficit during the pandemic.
The equivalent deficit figure for the UK was 14.2%.
Economists at the IFS said neither of these figures took into account the cost of writing off unrepaid loans to businesses made during the pandemic, which could push the deficits up by a further 1.3 percentage points.
While Scotland’s notional deficit will likely fall as the Covid-19 crisis recedes, the IFS said it will remain substantially higher than the UK’s.
Oil revenues would have to grow tenfold or economic performance would have to improve dramatically in a short period in order to avoid this, the IFS said, with neither scenario assessed as being likely.
Fiscal transfers from the rest of the UK would cease under independence, the think tank said, meaning some combination of tax rises or spending cuts would be needed unless stronger economic performance could be quickly delivered and sustained.
David Phillips associate director at the IFS, said: “Unsurprisingly Scotland’s implicit budget deficit rose significantly in 2020-21, reflecting the impact of the Covid-19 pandemic on revenues and spending.
“Under current constitutional arrangements, this borrowing was subsumed within wider UK Government borrowing, which also reached a peacetime record.”
The UK Government has announced increases in income tax and corporation tax to help reduce its budget deficit... An independent Scotland would need to do the same and more
David Phillips, IFS
He said it was unclear whether an independent Scotland could have borrowed as heavily as the UK had, as much would depend on its currency choices.
The IFS said there was a difference between the UK’s temporary surge in borrowing and the “large structural deficit” an independent Scotland would start life with.
Mr Phillips continued: “The UK Government has also announced increases in income tax and corporation tax to help reduce its budget deficit in the medium-term.
“An independent Scotland would need to do the same and more – or be prepared to cut spending further – given that Scotland’s non-Covid spending is currently much higher than that in the rest of the UK while its revenues are not.
“Only in the unlikely event of a massive rebound in oil revenues or a rapid and large improvement in economic performance-boosting tax revenues could such measures be avoided.”