A newly independent Scottish state would have to implement eye watering spending cuts or tax increases to stay afloat, according to new analysis.
If the new state were to balance the books using tax increases alone then Scotland’s three income tax bands, which are broadly equivalent to the basic rate in the rest of the UK, would have to go up by 26 pence in the pound, taking Scotland’s basic rate to 46 pence. Alternatively, the gap could be filled by raising VAT from 20 per cent to 49 per cent. Such massive tax rises would represent at least 10 per cent of Scotland’s GDP.
The analysis comes from a report by libertarian-leaning campaign group the TaxPayers’ Alliance (TPA), and was written by TPA chairman and ex-Treasury economist Mike Denham. It finds that Scotland’s fiscal deficit last year, at 8.6 per cent of GDP, was 14 times the euro area average and higher than any of the OECD’s 37 member countries. The report states an independent Scotland could attempt to fund its deficit by borrowing but that there would be cost and capacity constraints, while any workable independence agreement with the UK would require Scotland carry its share of existing UK government debt obligations.
Scotland’s share of the UK’s liabilities is currently estimated by the TPA at around £300 billion (including borrowing and a share of the UK’s unfunded public sector pension liability), or roughly twice the size of Scotland’s GDP.
‘An independent Scotland would enter the international financial markets as an already heavily indebted, small, and untested sovereign borrower, issuing debt in a currency it did not itself control,’ says the report, warning that interest rates on Scottish debt would be considerably higher than for equivalent UK sovereign bonds, and that debt markets would ‘demand a robust fiscal consolidation plan, backed by an immediate and credible demonstration of intent, with significant spending cuts and/or tax increases’.
The report goes on to say, unsurprisingly, that experience from fiscal consolidations globally suggests spending cuts are less harmful to growth than tax increases, and that debt market confidence is more likely to be gained by implementing the former.