The IFS and Scottish Independence

The new report by the independent Institute for Fiscal Studies (IFS) on the fiscal context of Scottish independence is to be welcomed. The report is published today and will be presented to the David Hume Institute Autumn Seminar Series this evening.

However, there is little that is fundamentally new in the report compared to the analyses already published by CPPR and - dare I say it - this blog here, here and here.

But it does provide more precision on Scotland's fiscal position in the run up to the referendum and possibly thereafter. This is achieved by a thorough appraisal of the UK's fiscal position and Scotland's relation to it. The report's presentation of the nuts and bolts of Scotland's public finances is also illuminating and more so than Government Expenditure and Revenues Scotland (GERS) from which it draws much of its data.

Its findings are neatly summed up by one of the report's authors, David Phillips, who suggests that

Independence would provide Scotland with an opportunity to set its own fiscal course. In common with all countries it would face constraints and would have to make, sometimes uncomfortable, choices. In the short run its higher public spending than the UK average could be covered by oil and gas revenues if these are assigned on a geographic basis. In the longer run the loss of these revenues would lead to tougher choices than those faced by the UK as a whole.

The reasons offered for a more difficult long-run fiscal position than the UK is the expected marked fall in oil revenues, the volatility of oil revenues and a worse demographic position associated with a rising dependency ratio due to a more rapidly ageing population.

The report notes that the borrowing costs faced by an independent Scottish government "will be a very important question for the sustainability of the Scottish public finances." But doesn't go as far as asserting that these costs will definitely be higher, something that the present Scottish government will be grateful for.

The IFS argue that the new government's borrowing costs would depend on factors such as the announced fiscal stance of the government, its perceived credibility and many other economic decisions. It notes that the UK government has low borrowing costs and implies that Scotland would not have such low costs unless it adopts a similar tight fiscal stance and gains the same degree of credibility.

But since the IFS does not deal with monetary policy issues the Institute fails to consider why Scotland might have higher borrowing costs due to an independent Scotland borrowing in a foreign currency and being unable to print its own currency (i.e. through the adoption of sterling or the euro), or would lack any initial monetary policy credibility if it did adopt its own currency straight away.

The report is also clear that it is solely focusing on fiscal policy and so is ignoring other economic policies such as industrial policy, and regulation. That is important, because if you are a nationalist you might believe that an independent Scotland will enable a more radical growth enhancing industrial policy to be introduced. Such a policy, if successful at raising the growth rate would narrow the fiscal gap that IFS see emerging as oil revenues decline and demographic factors kick in. Readers will know that I have my doubts about the likelihood of such a policy but it cannot be ignored and its feasibility needs to be examined and debated.

By eschewing consideration of policy other than fiscal policy the report also misses other possibilities that could mitigate the probable difficult fiscal situation in an independent Scotland. So, for example, a more open migration policy would, if successful, attract in young migrants of working age. This would help boost the birth rate, raise the tax base and lower the dependency ratio. A separate macro-stabilisation policy under independence - or devolution plus - might help smooth the volatility of Scottish GDP, and minimise inflation. Both outcomes could help growth and the fiscal position.

This is a good report. It makes clear the fiscal realities that confront an independent Scotland. And it is a strong antidote to the SNP government's posturing that under independence each person in Scotland would be £500 better off.

The report does raise several questions about the future of fiscal policy in an independent Scotland and identifies the areas for further research. But there is also a need for a wider analysis and debate of the economic issues relating to Scottish independence.

 

Comments

[Dick Winchester]

The other topic the IFS fails to consider is the £40bn annual benefit the oil and gas industry brings to the UK's balance of payments by way of services and products the majority of which will be coming from the NE of Scotland. This figure was mentioned in an interviw by the BBC's Douglas Fraser with Ian Wood.

Independence would of course transfer most of this £40bn benefit to Scotland providing it with an immediate and substantial trade surplus whilst the "rump" of the UK's trade deficit would almost double.

It would therefore seem likely that an independent Scotland's credit rating would be more than secure and its borrowing costs quite possibly lower than what remains of the UK.

[Neil]

"Independence would of course transfer most of this £40bn benefit to Scotland providing it with an immediate and substantial trade surplus whilst the "rump" of the UK's trade deficit would almost double."

It doesn't answer the question about what is a declining resource which will never again reach 1999 levels and which will probably see saw up and down in price (albeit with an upward trend)making budgeting difficult. In addition the effect would surely be inflationary with imported goods rocketing in price?

[Dick Winchester]

Yes - it's a declining resource although it is generally accepted that there is another 25 billion barrels to be recovered with a value of 2,500 billion dollars. That figure is of course a "today" figure and doesn't take into account potential future finds and improvements in recovery rates. Norway has recently found a couple of very large fields of over 1bn barrels so it's never sensible to say never in the oil and gas industry!

It's also accepted that on present estimates there is another thirty to forty years worth of production left although BP has been talking about 50 years for new W of Shetland finds.

However, the point is that all this gives Scotland plenty of time to diversify its industry and to properly grow other sectors. It must be remembered that one of the huge problems the Scottish economy has is exceptionally low R&D levels and very poor levels of investment in start-ups, spin-outs and especially growing companies. Independence and access to our oil revenues, should help cure or at least improve that situation

[Grant]

It should also be pointed out that the "peak oil in 1999 argument" is most certainly a red herring. There is certainly less oil extracted from the mature North Sea basin now than in 1999, but revenues are considerably higher now than they were in 1999.

In 1999/2000 total UK oil revenues were £2,510m

In 2011/12 they were £11,250m

Source: http://www.hmrc.gov.uk/stats/corporate_tax/table11-11.pdf

[cynicalHighlander]

I think I would rather have oil than Losses on bailed out banks and lies about public debts to base my income on.

[cheap football jerseys]

"Independent of course will transfer the benefits of most of the £40 billion provides it immediately Scotland and huge trade surplus, and" residual "British trade deficit will be doubled.

[Tony Little]

The IFS report is a good basis for a proper discussion, and both sides of the argument need to be more open about their respective thinking. Less "posturing" and more fact-based discussion would be welcome. It is a shame that the MSM in Scotland is only interested in picking up the negatives from the report, and the BBC Scotland has yet to demonstrate to me that they are able to present information in an unbiased way. Hopefully that will change.

However, what this report appears to overlook completely is the expenditure side of the case. To take only one example: Trident.

Assuming that the SNP government are re-elected in 2016 with a manifesto commitment to rid the country of WMD, there will be millions of immediate savings, and billions in the next 25 years. Consider these savings with the revenue and the net impact is a far healthier economy. Time enough to reconfigure it for the 21st century.

The question that the pro-Union parties have to answer, is what will they do to improve Scotland (economically, socially, health etc.) if Scots vote to remain dependent on the political whim of Westminster?

[A_D_McLean]

A disappointingly partisan conclusion

"And it is a strong antidote to the SNP government's posturing that under independence each person in Scotland would be £500 better off."

The IFS report is a much bigger antidote to the unionist argument, run over many years, that Scotland is, of necessity, dependent on transfers of funding from wealthier parts of the UK.

The IFS report summarises the position as:

"Ignoring North Sea oil and gas, Scottish tax revenues per head are almost the same as the UK average."

Disappointed you didn't welcome that corrective to the ridiculous notion propagated by Iain Duncan Smith that Scotland will not be able to afford its welfare bill if it leaves the Union. http://bit.ly/QlDyi2

Huge transfers of resources take place between Scotland and the UK, in both directions, with Scotland losing much of the economic impact of its own tax revenues along the way. Post-independence, these flows would reduce, and Scotland could use its tax base to build its economy instead of to fund the higher welfare spend flowing from its relative economic decline.

[Brian Ashcroft]

No, sorry, your point about revenues per head being similar is, with respect, irrelevant. The issue is the extent to which spending per head is greater in Scotland than in UK/rUK. Even with a geographical share of oil Scotland has run a sizable 'deficit' since the 1990s. Things have got better with a high oil price. But with falling oil revenues in prospect - see OBR forecast - there is a question, as IFS note, about the sustainability of Scotland's current fiscal outlays. So maybe Ian Duncan Smith has a point.