Scotland would likely see tax rises after independence

A study by the Institute for Government (IFG) says Scotland would have to make ‘difficult fiscal adjustments’ if they went independent and would be forced to impose spending cuts and tax rises to balance the books

The report shows that in 2018/19, Scotland ran a deficit of over 7% of gross domestic product (GDP), well over twice the 3% level mandated for countries hoping to join the EU, and far higher than the English deficit in that year of 0.3% of GDP. Scotland also had the highest level of spending per person on domestic public services out of all the nations spending £7,985 per person in 2018/19 or 27.4% more than the £6,268 spent in England.

The latest research follows a report this week from the Institute for Fiscal Studies (IFS) which estimates the gap between Scottish public spending and tax revenues rose to between 22% and 25% of the country’s GDP during the pandemic.

The IFG say that the likely target of an independent Scotland’s tax hikes would be on immovable assets such as land or property but this would be unlikely to happen quickly enough to avoid the necessity for difficult tax and spending choices after secession.

The IFG also warns that the cost of independence would be that Scotland ‘would no longer be able to benefit from the redistribution of resources that currently takes place across the UK’.

Dr Gemma Tetlow, chief economist at the IFG said: ‘Even before the pandemic, Scotland’s underlying fiscal deficit was over 7% of GDP. This would not be sustainable if Scotland was an independent country. Scotland could in principle be a successful small, independent economy but advocates for breaking away from the UK must address the reality of Scotland’s current fiscal imbalance and the difficult policy choices this would necessitate after secession.’

The report states that another way for Scotland to reduce their fiscal deficits if they become independent would be to increase economic growth, it says that ‘the fiscal arithmetic is easier if the economy grows faster and that taxes generate more revenue and spending can be squeezed relative to the size of the economy without requiring cash or real terms cuts to spending levels’.

The IFG report added: ‘A major part of the SNP’s pitch on independence is that an independent Scottish government could tailor policy to better suit the needs of Scotland and so boost growth.’ However, even if Scotland pursued new economic growth policies with the powers of independence, these would take time to make a difference.

All three of the smaller UK nations would face a sizeable fiscal deficit if they were to break away from the rest of the UK but Scotland’s fiscal position is also markedly weaker now than it was when the last independence referendum was held, in 2014, largely because of the decline in output and revenues from the North Sea. ‘The uncertainty and disruption [of] breaking away from an established fiscal, monetary and trading union could drag on growth.’

The report concluded: ‘There are many potential benefits that some are attracted to in the idea of an independent Scotland. There are also a range of discontents with the operation of current UK policies and devolution settlements within the UK, which some feel do not deliver for them. But any decision about seceding from the union must grapple with the reality of the current fiscal position of the UK’s constituent nations.’

Ruby Flanagan |Reporter, Accountancy Daily

Ruby Flanagan is reporter on Accountancy Daily. Contact her on ruby.flanagan@croneri.co....

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