Achieving fiscal sustainability:
alternative scenarios for Scotland
Gemma Tetlow
© Institute for Fiscal Studies
Overview
• IFS basic model applies OBR assumptions about the UK to
Scotland
– Suggests an independent Scotland would have a greater and more
immediate long-run fiscal problem than the UK as a whole
• “Fiscal gap”: to get public sector debt back to 40% of national
income by 2062–63
– Scotland: requires 4.1% of national income tightening
– UK: requires 0.8% of national income tightening
• Results are sensitive to a number of assumptions
– North Sea production and revenues; migration; productivity growth;
debt allocation; interest rate on public sector debt
• Show sensitivity to a variety of assumptions
– Main message – that Scotland faces tougher long-run fiscal
challenges than UK as a whole – remains
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North Sea revenues
• Basic model:
– Decline based on OBR forecast to 2017–18
– Constant as % national income thereafter
• Revenues likely to decline by more than this in the long-run
– Basic model assumes NS revenues remain at 2.2% of Scottish GDP
– OBR central projection is for revenues to fall to 0.4% of GDP by
2040
• Revenues from the North Sea might be higher in the mediumterm
– Scottish Government suggests production and prices will be higher
in medium-term, leading to higher revenues
• Alternative scenario: „North Sea decline (1)‟
– North Sea revenues decline as suggested by OBR central forecast
• Alternative scenario: „North Sea decline (2)‟
– Based on most optimistic, scenario 5, from Scottish Government, Oil
and Gas Analytical Bulletin; then declines over longer-run
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Alternative forecasts for North Sea revenues
Percent of national income
9%
8%
Revenue replacement (IFS basic model)
7%
North Sea decline (1)
North Sea decline (2)
6%
5%
4%
3%
2%
1%
© Institute for Fiscal Studies
Source: Amior, Crawford and Tetlow (2013a), Figure 3.5.
2060-61
2057-58
2054-55
2051-52
2048-49
2045-46
2042-43
2039-40
2036-37
2033-34
2030-31
2027-28
2024-25
2021-22
2018-19
2015-16
2012-13
2009-10
2006-07
2003-04
2000-01
0%
Alternative scenarios: North Sea revenues
Public sector net borrowing
Percent of national income
20%
15%
Revenue replacement (IFS basic model)
North Sea decline (1)
North Sea decline (2)
10%
5%
0%
2012-13
2014-15
2016-17
2018-19
2020-21
2022-23
2024-25
2026-27
2028-29
2030-31
2032-33
2034-35
2036-37
2038-39
2040-41
2042-43
2044-45
2046-47
2048-49
2050-51
2052-53
2054-55
2056-57
2058-59
2060-61
2062-63
-5%
© Institute for Fiscal Studies
Source: Amior, Crawford and Tetlow (2013a), Figure 3.6.
Alternative scenarios: North Sea revenues
Public sector net debt
Percent of national income
300%
250%
Revenue replacement (IFS basic model)
North Sea decline (1)
North Sea decline (2)
Fiscal gap = 5.7%
200%
150%
100%
Fiscal gap = 3.6%
50%
2012-13
2014-15
2016-17
2018-19
2020-21
2022-23
2024-25
2026-27
2028-29
2030-31
2032-33
2034-35
2036-37
2038-39
2040-41
2042-43
2044-45
2046-47
2048-49
2050-51
2052-53
2054-55
2056-57
2058-59
2060-61
2062-63
0%
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Source: Amior, Crawford and Tetlow (2013a), Figure 3.7.
Productivity growth
• Basic model: 2.2% a year growth in labour productivity
• Average productivity growth in Scotland could be lower than this
– Declining output from North Sea
– To maintain average growth of 2.2% requires onshore productivity to
increase more rapidly
• Alternative scenario: „1.7% productivity‟
– Onshore economy experiences average productivity of 2.2%
– North Sea output disappears entirely by 2062–63
– Average productivity growth in Scotland would be 1.7% a year
• In the model, lower productivity growth...
– Revenues and non-interest spending grow less quickly in real terms,
but amount to same share of national income as in basic model
– But accumulated debt becomes more burdensome to service
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Alternative scenarios: productivity growth
Public sector net borrowing
Percent of national income
20%
18%
16%
2.2% a year (IFS basic model)
1.7% a year
14%
12%
10%
8%
6%
4%
2%
2012-13
2014-15
2016-17
2018-19
2020-21
2022-23
2024-25
2026-27
2028-29
2030-31
2032-33
2034-35
2036-37
2038-39
2040-41
2042-43
2044-45
2046-47
2048-49
2050-51
2052-53
2054-55
2056-57
2058-59
2060-61
2062-63
0%
© Institute for Fiscal Studies
Source: Amior, Crawford and Tetlow (2013a), Figure 3.3.
Alternative scenarios: productivity growth
Public sector net debt
Percent of national income
300%
250%
2.2% a year (IFS basic model)
1.7% a year
Fiscal gap = 4.5%
200%
150%
100%
50%
2012-13
2014-15
2016-17
2018-19
2020-21
2022-23
2024-25
2026-27
2028-29
2030-31
2032-33
2034-35
2036-37
2038-39
2040-41
2042-43
2044-45
2046-47
2048-49
2050-51
2052-53
2054-55
2056-57
2058-59
2060-61
2062-63
0%
© Institute for Fiscal Studies
Source: Amior, Crawford and Tetlow (2013a), Figure 3.4.
Migration
• Basic model: ONS „low migration‟ projection
– Net inward migration averaging 9,000 per year
• Migration to an independent Scotland could be higher than this
– Independent Scottish government might pursue more liberal
immigration policy than currently being pursued by UK government
• Alternative scenario: „high migration‟
– ONS „high migration‟ projection
– Net inward migration averaging 26,000 a year
• In the model, greater inward migration...
– Migrant population on average younger than existing Scottish
population
– Increases tax revenues
– Increases public spending but less than revenue increase
– Borrowing and debt rise less rapidly
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Alternative scenarios: migration
Public sector net borrowing
Percent of national income
20%
18%
16%
ONS „low migration‟ (IFS basic model)
ONS „high migration‟
14%
12%
10%
8%
6%
4%
2%
2012-13
2014-15
2016-17
2018-19
2020-21
2022-23
2024-25
2026-27
2028-29
2030-31
2032-33
2034-35
2036-37
2038-39
2040-41
2042-43
2044-45
2046-47
2048-49
2050-51
2052-53
2054-55
2056-57
2058-59
2060-61
2062-63
0%
© Institute for Fiscal Studies
Source: Amior, Crawford and Tetlow (2013a), Figure 3.1.
Alternative scenarios: migration
Public sector net debt
Percent of national income
300%
250%
ONS „low migration‟ (IFS basic model)
ONS „high migration‟
200%
150%
100%
Fiscal gap = 3.0%
50%
2012-13
2014-15
2016-17
2018-19
2020-21
2022-23
2024-25
2026-27
2028-29
2030-31
2032-33
2034-35
2036-37
2038-39
2040-41
2042-43
2044-45
2046-47
2048-49
2050-51
2052-53
2054-55
2056-57
2058-59
2060-61
2062-63
0%
© Institute for Fiscal Studies
Source: Amior, Crawford and Tetlow (2013a), Figure 3.2.
Debt level and interest rate
• Basic model:
– Population share of debt
– 5% interest rate from 2026–27
• Scotland could inherit a different share of accumulated debt
• Scotland might face a higher interest rate
– Small economy with no track record on fiscal management
– What currency would Scotland adopt? What currency would debt be
denominated in?
• Alternative scenario: „40% debt, 5% interest rate‟
– Illustrative figure: approximately pre-crisis level of UK debt
• Alternative scenario: „Population share of debt, 5.72% interest
rate‟
– Armstrong and Ebell (2013) estimate that Scottish interest rate would
be 0.72 to 1.65 percentage points above UK rate
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Alternative scenarios: debt level and interest rate
Public sector net borrowing
Percent of national income
20%
18%
16%
14%
Population share of debt, 5% interest rate (IFS basic model)
Population share of debt, 5.72% interest rate
40% of GDP debt, 5% interest rate
12%
10%
8%
6%
4%
2%
2012-13
2014-15
2016-17
2018-19
2020-21
2022-23
2024-25
2026-27
2028-29
2030-31
2032-33
2034-35
2036-37
2038-39
2040-41
2042-43
2044-45
2046-47
2048-49
2050-51
2052-53
2054-55
2056-57
2058-59
2060-61
2062-63
0%
© Institute for Fiscal Studies
Source: Amior, Crawford and Tetlow (2013a), Figure 3.8.
Alternative scenarios: debt level and interest rate
Public sector net debt
Percent of national income
300%
250%
Population share of debt, 5% interest rate (IFS basic model)
Population share of debt, 5.72% interest rate
40% of GDP debt, 5% interest rate
200%
Fiscal gap = 4.6%
150%
100%
Fiscal gap = 3.2%
50%
2012-13
2014-15
2016-17
2018-19
2020-21
2022-23
2024-25
2026-27
2028-29
2030-31
2032-33
2034-35
2036-37
2038-39
2040-41
2042-43
2044-45
2046-47
2048-49
2050-51
2052-53
2054-55
2056-57
2058-59
2060-61
2062-63
0%
© Institute for Fiscal Studies
Source: Amior, Crawford and Tetlow (2013a), Figure 3.9.
Composite scenarios
• „Optimistic‟ scenario
– 40% debt
– „high migration‟
– North Sea decline (2)
• „Pessimistic‟ scenario
– Population share of debt
– 1.7% productivity growth
– North Sea decline (1)
– (But still assume 5% interest rate on debt)
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Composite scenarios
Public sector net borrowing
Percent of national income
25%
20%
15%
Scotland: basic model
Scotland: 'optimistic' scenario
Scotland: 'pessimistic' scenario
UK
10%
5%
0%
2012-13
2014-15
2016-17
2018-19
2020-21
2022-23
2024-25
2026-27
2028-29
2030-31
2032-33
2034-35
2036-37
2038-39
2040-41
2042-43
2044-45
2046-47
2048-49
2050-51
2052-53
2054-55
2056-57
2058-59
2060-61
2062-63
-5%
© Institute for Fiscal Studies
Source: Authors‟ calculations and Figure 4.1 of Amior, Crawford
and Tetlow (2013a).
Composite scenarios
Public sector net debt
Percent of national income
400%
350%
300%
Scotland: basic model
Scotland: 'optimistic' scenario
Scotland: 'pessimistic' scenario
UK
Fiscal gap = 6.3%
(£10 billion)
250%
200%
150%
100%
50%
UK fiscal gap =
0.8%
Fiscal gap = 4.1%
(£6 billion)
Fiscal gap = 1.9%
(£3 billion)
2012-13
2014-15
2016-17
2018-19
2020-21
2022-23
2024-25
2026-27
2028-29
2030-31
2032-33
2034-35
2036-37
2038-39
2040-41
2042-43
2044-45
2046-47
2048-49
2050-51
2052-53
2054-55
2056-57
2058-59
2060-61
2062-63
0%
© Institute for Fiscal Studies
Source: Authors‟ calculations and Figure 4.2 of Amior, Crawford
and Tetlow (2013a).
Closing the fiscal gap in Scotland?
• Tax increases and/or spending cuts required
• Revenue yield from example tax increases (in 2014–15)
– +1ppt on main rate of VAT = £430 million
– +1ppt on basic rate of income tax = £365 million
• Indicative scale of spending squeeze required
– £3 billion would equate to 6% of total non-interest spending, or 8%
of public service spending
• Policies mooted by current Scottish government
– Increase spending: higher aid spending, delay or scrap planned rise
in state pension age, reverse cuts to housing benefit
– Reduce spending: cut defence spending
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Conclusions
• Independent Scotland would face unsustainably increasing
levels of public sector debt over next 50 years unless further tax
increases or spending cuts were announced
• Fiscal gap facing Scotland would be larger than for the UK
– Larger gap between spending and revenues at baseline
– More rapidly ageing population
– Much more reliant on revenues from the North Sea, which are likely
to decline over the longer-run
• This conclusion is robust to a wide range of possible
assumptions
• Long-run fiscal pressures should form important backdrop to any
discussions about changes to tax/spending policies of
independent Scotland
– Independent Scotland can achieve fiscal sustainability but would
need to make some difficult decisions
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