Scotland’s long-term fiscal prospects: latest IFS analysis

The Institute for Fiscal Studies often upsets governments by not agreeing with their policy prescriptions or with their view of the future. So the recent analysis of Scotland’s fiscal prospects by the IFS may have been unwelcome to the Scottish Government, but it is not the first government to be upset by the Institute’s analysis, nor will it be the last. The crucial difference between this analysis and those that have gone before is that the issue at stake for Scotland is constitutional change rather than electoral advantage. Hence the need to ensure that the analysis of Scotland’s fiscal prospects post-independence uses the best available data in the most authoritative fashion.

The IFS analysis rests on two principal datasets: Government Expenditure and Revenue in Scotland, prepared by the Scottish Government and the Public Expenditure Statistical Analyses prepared by HM Treasury. Neither of these is perfect: there are areas where approximations have to be made. But over the years, both datasets have been improved and are broadly consistent with each other and with other reputable data sources.

The IFS analysis of Scotland’s fiscal prospects is similar to that used by the Office of Budget Responsibility (OBR) to forecast the U.K.’s long-term tax and spending prospects. It is based on a large number of assumptions about how tax revenues and spending will evolve. These may be the best available in the light of present knowledge, but there is always a chance that they will be overtaken by future events.

For the UK as a whole, the most recent OBR fiscal sustainability report argues that as a result of demographic change, budget deficits will tend to widen to potentially unsustainable levels unless fiscal policy is tightened. The IFS analysis suggests that an independent Scotland would have two additional problems: the declining value of North Sea oil revenues, which are proportionately more important to Scotland than to the UK as a whole; and the fact that Scotland’s old-age dependency ratio will increase faster than the UK’s.  Hence, while Scotland starts from a deficit quite similar to the UK, the IFS analysis suggests that an independent Scotland’s “fiscal gap” would eventually be considerably larger than the UK’S.

The IFS version of the OBR model is quite mechanistic in that it does not attempt to predict how an independent Scotland’s policies might change in response to fiscal pressures. Nevertheless, many of the assumptions built into the model are realistic, or at least are the best available on current evidence. Hence the IFS’s warnings that independence carries fiscal risks as well as opportunities may not be particularly palatable to the Scottish Government, but have to be given serious consideration.

About David Bell

David Bell FRSE is Professor of Economics at the University of Stirling. He graduated in economics and statistics at the University of Aberdeen and in econometrics at the London School of Economics. He has worked at the Universities of St Andrews, Strathclyde, Warwick and Glasgow. His research is mainly in labour economics, fiscal decentralization and the economics of long-term care. He has been budget adviser to the Scottish Parliament Finance Committee. He is PI for the Healthy AGing In Scotland project (HAGIS).
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