Cutbacks of £8.5BILLION or tax rises of £8.5BILLION
Just TWO stark choices if Scotland goes independent, says think tank:
UP to £8.5billion of tax rises or public spending cuts would have to be imposed if Scotland became independent, according to a respected think tank.
The Institute for Government warned that borrowing would need to be cut to sustainable levels no matter which currency option was chosen.
It also said interest charges would be higher for a separate Scotland than the UK in the ‘medium term’ due to its lack of a track record and its more volspending atile tax base. The institute highlighted that no other advanced economy has consistently borrowed as much as an independent Scotland would, based on its pre-pandemic implicit deficit, which is worth 8 per cent of total GDP.
A separate Scotland would have to implement ‘fiscal consolidation’ to bring the deficit down to 3 per cent, according to the report, which is equivalent to a reduction of between £6.5billion and £8.5billion based on current GDP figures. It said this gap cannot be closed by less on defence or higher growth in the early years, so tax rises or spending cuts would be necessary.
Thomas Pope, deputy chief economist at the institute and author of the report on Scotland’s borrowing, said: ‘If Scotland were to become independent, it would struggle to borrow much more than 3 per cent per year consistently in normal (non-crisis) times at a low price from international debt markets. This would require a fiscal consolidation of 4 per cent to 5 per cent of GDP compared to the pre-coronavirus fiscal position.
‘Even then, Scotland would find it more expensive to borrow than the UK because it would be a smaller country without an established track record. These would not be insurmountable challenges for an independent Scotland, but there would be no avoiding difficult economic choices.’
The report concluded pegging a new Scottish currency to the value of another currency, or forming a pound-sharing currency union as proposed in 2014, are ‘not initially viable’.
It warned that setting up a new currency would result in a ‘volatile’ value which makes it harder for Scotland to trade, while continuing to use the pound as part of an informal currency union would mean the Bank of England would make key decisions – and Scotland would be left unable to print its own money or engage in any quantitative easing to deal with a crisis.
Even if the deficit did come down to around 3 per cent, the report said an independent Scotland would still pay higher interest rates than the UK.
It estimated that the premium paid would be between 0.4 and 0.9 percentage points higher than the UK, due to the
‘No avoiding difficult choices’ ‘SNP has never provided clarity’
lack of a track record on repaying debts. The report said the higher debt interest costs would result in ‘lower spending elsewhere or higher taxes’.
Scottish Conservative finance spokesman Liz Smith said the SNP and Finance Secretary Kate Forbes had ‘never provided any clarity about what new currency would be used in an independent Scotland’, nor acknowledged ‘the additional debt and borrowing costs’.
A Scottish Government spokesman said: ‘There is no reason an independent Scotland would not also be a successful economy – free of the damage of Brexit.’