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.
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.