The fiscal context for Scottish independence
Paul Johnson
May 2 2013
© Institute for Fiscal Studies
Outline
• The UK faces a tough set of choices over public finances up to
2017-18 and beyond
– Outstanding debt will be at historically high levels for some time
• The Scottish fiscal position is similar to that of rest of UK once oil
is accounted for
– Even including oil may be no better than/worse than, UK by 2017-18
• An independent Scotland would have a range of fiscal choices
– Fiscal rules, taxes, spending
• Drawing on
– Green Budget 2013 http://www.ifs.org.uk/publications/6562
– Scottish independence: the fiscal context
http://www.ifs.org.uk/publications/6444
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UK public finances
• Deficit gradually falling from post war peak
• Still over 5% of national income in 2014-15
• Planned return toward balance involves very major further
spending cuts (or tax increases) thereafter
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UK deficit gradually falling from post WW2 peak
And still at over 5% of GDP in 2014-15
Percentage of national income
15
PSNB
10
5
0
-5
Source: IFS calculations; HM Treasury; Office for Budget Responsibility.
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2015–16
2010–11
2005–06
2000–01
1995–96
1990–91
1985–86
1980–81
1975–76
1970–71
1965–66
1960–61
1955–56
1950–51
-10
UK public finances
• Deficit gradually falling from post war peak
• Still over 5% of national income in 2014-15
• Planned return toward balance involves very major further
spending cuts (or tax increases) thereafter
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Disease and cure (December 2012)
Dec 2012: 8.2% national income (£129bn) hole in public finances,
offset by 9.2% national income (£144bn) consolidation over 8 years
Percentage of national income
10
Other current spend
Debt interest
Benefits
Investment
Tax increases
9
8
7
6
5
85%
4
3
2
1
15%
0
2010–11 2011–12 2012–13 2013–14 2014–15 2015–16 2016–17 2017–18
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Notes and sources: see Figure 5.8 of The IFS Green Budget: February 2013.
Departmental spending: SR2013 and beyond
Spending Review 2010 period
110
'Unchanged policy' projections
100
–8.9%
–9.1%
–11.7%
90
80
–18.4%
–2.8%
–7.6%
Will be allocated between
departments in 2013
Spending Review
70
60
Will be allocated between
departments after next
election
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Note: DEL figures from 2013-14 are adjusted for changes for local government
funding for Business Rates Retention and Council Tax Benefit localisation
2017-18
2016–17
2015–16
2014–15
2013–14
2012–13
2011–12
50
2010–11
Real DEL spending (2010–11 = 100)
120
UK public finances
• Deficit gradually falling from post war peak
• Still over 5% of national income in 2014-15
• Planned return toward balance involves very major further
spending cuts (or tax increases) thereafter
• At over 80% of GDP national debt will be high
– By historical and international standards
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Government net debt as % of national income, 2011
Greece
Japan
Italy
Portugal
Ireland
Belgium
United States
France
United Kingdom
Israel
Iceland
Spain
Germany
Austria
Canada
Korea
Netherlands
Switzerland
San Marino
New Zealand
Australia
Denmark
Estonia
Sweden
Finland
Norway
165.4
126.4
99.6
97.3
94.9
81.4
80.3
78.8
76.6
67.5
65.9
57.5
55.3
52.1
33.1
32.9
31.7
25.9
17.9
8.3
8.2
0.2
-0.2
-18.2
-54.1
-168.2
-200
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-150
-100
-50
0
Percentage of national income
50
100
150
200
UK public finances
• Deficit gradually falling from post war peak
• Still over 5% of national income in 2014-15
• Planned return toward balance involves very major further
spending cuts (or tax increases) thereafter
• At over 80% of GDP national debt will be high
– By historical and international standards
• OBR projects that fiscal position will worsen significantly in the
long run as a result of demographic ageing
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OBR shows fiscal balance worsening by £65bn
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Scottish position
• Depends on North Sea Oil
– In recent years in slightly better position than rest of UK when
assigned geographical share
– Considerably worse when not
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1980–81
1981–82
1982–83
1983–84
1984–85
1985–86
1986–87
1987–88
1988–89
1989–90
1990–91
1991–92
1992–93
1993–94
1994–95
1995–96
1996–97
1997–98
1998–99
1999–00
2000–01
2001–02
2002–03
2003–04
2004–05
2005–06
2006–07
2007–08
2008–09
2009–10
2010–11
2011–12
Net fiscal balance
as a percentage of GDP
Net fiscal balance % of GDP, UK and Scotland
20%
15%
10%
5%
0%
-5%
-10%
-15%
-20%
Scotland, including population share of North Sea oil
Scotland, including geographical share of North Sea oil
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UK, 100% of North Sea oil
Scottish position
• Depends on North Sea Oil
– In recent years in slightly better position than rest of UK when
assigned geographical share
– Considerably worse when not
• For well known reasons – tax per head is very similar to rest of UK,
spending much higher
– Income per person is also very similar
• Estimates from CPPR suggest that even including oil the Scottish
position will have become worse than UK by 2017-18
– Of course dependant on uncertain oil revenues
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Projected fiscal deficits as % of GDP
2012-13
2017-18
Scotland
14.0%
7.9%
UK
8.0%
2.5%
Excluding Oil
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Projected fiscal deficits as % of GDP
2012-13
2017-18
Scotland
14.0%
7.9%
UK
8.0%
2.5%
Scotland
7.5%
4.4%
UK
7.4%
2.2%
Excluding Oil
Including Oil
Source: CPPR
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Issues
• All countries are facing fiscal pressures over short, medium and
longer terms
• An independent Scotland would need to take some decisions over
– Fiscal stance
– Tax revenues
– Spending
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Fiscal stance
• In broad terms likely to involve heading towards medium term
current budget balance excluding oil revenues
• But is not independent of currency choice
• Independent currency would allow stance to be set independently
• Membership of Euro would require signing up to EU rules
• And if sterling is retained?
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Tax revenues UK and Scotland
30
25
20
15
10
5
0
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UK
Scotland
Tax issues for an independent Scotland
• There is a great deal wrong with current UK system
– Independence would provide an opportunity for change
• Specific Scottish differences should impact on design
– More equal income distribution and different labour market
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More high earners in England
Weekly Pay by Nation
40
% of Employees in Each Wekly Pay Band
35
30
25
20
England
Scotland
15
10
5
0
£1 - £199
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£200 - £399
£400 - £599
£600 - £799
Weekly Pay Band
£800 - £999
£1000 - £1499
£1500+
Tax issues for an independent Scotland
• There is a great deal wrong with current UK system
– Independence would provide an opportunity for change
• Specific Scottish differences should impact on design
– More equal income distribution and different labour market
• Openness to rest of the UK
• Potential for tax competition with rest of UK and need to rely on
less mobile tax bases
– Sustainable revenue may be lower
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Spending issues for an independent Scotland
• Spending per capita is higher across the board
– Not just in those areas like HE and social care where specifically
different courses have been chosen
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Spending per capita UK and Scotland
4000
3000
2000
Scotland
UK
1000
0
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Spending issues for an independent Scotland
• Spending per capita is higher across the board
– Not just in those areas like HE and social care where specifically
different courses have been chosen
• Choices will need to be made on basis of clear analysis of priorities
over short and long term
• Opportunities arise from e.g. fact that UK defence spending is
significantly higher as a share of national income than the average
of smaller countries
• Challenges come from e.g. older demographic structure and
greater reliance on sickness and disability benefits
© Institute for Fiscal Studies
At any age Scots more likely to get disability benefits
0.35
0.3
0.25
0.2
England
Scotland
0.15
0.1
0.05
0
15
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20
25
30
35
40
45
50
55
60
65
70
75
80
Scottish population is slightly older
14
12
10
8
6
England
Scotland
4
2
0
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Central prediction is that the gap will grow
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To conclude
• The UK, along with many other countries, is facing difficult fiscal
choices in the short and long term
• An independent Scotland would likely inherit an uncomfortably
large national debt
– With luck the annual deficit would be largely under control
• An independent Scotland would have the opportunity to set its
own fiscal rules
– Dependent on its currency choice
• And could implement a more efficient tax system
– Subject to constraints created by openness and competition
• Like most countries would face tough long term spending choices
– Perhaps quantitatively somewhat tougher than England
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