THE UK’s leading economic thinktank has challenged the SNP Government’s assertion that it could rely on borrowing to cope with a huge deficit if newly independent.
The Institute for Fiscal Studies (IFS) questioned whether Scotland could, like the UK, turn to “massive borrowing” and “not be concerned about a large budge deficit”.
IFS associate director David Phillips said that “only in the unlikely event of a massive rebound in oil revenues or a rapid and large improvement in economic performance” could an independent Scotland avoid cutting spending and raising taxes.
It followed the Government Expenditure and Revenue Scotland (GERS) report revealing Scotland had a record £36.3bn notional deficit in 2020/21, or 22.4 per cent of Scottish GDP, as a result of lower tax revenues and greater public spending during the pandemic.
The UK deficit also ballooned to 14.2% of GDP after massive Treasury borrowing.
First Minister Nicola Sturgeon said the pandemic had increased deficits round the world, insisting: “Having a deficit is not – self evidently – a barrier to any country in the world being independent.”
Her Finance Secretary Kate Forbes also said a newly independent Scotland could turn to quantitative easing (QE) and other borrowing to cope with a deficit, although she was unable to say the rate at which Scotland could borrow from the markets.
She also conceded Scotland would first have to set up a central bank and other fiscal infrastructure, as well as adopt a new currency, before it could use QE.
In its response to the GERS report, the IFS said it was “not clear” that the UK’s example during the pandemic could be followed by an independent Scotland.
It said: “A structural deficit of the scale of Scotland’s would not be sustainable on an ongoing basis. It would need to be tackled by some combination of spending cuts and/or tax rises, in the absence of much stronger economic performance, which is unlikely.”
It said there was a difference between a “temporary surge” in UK borrowing for the pandemic and the “large structural deficit that an independent Scotland would start life with”.
In addition, the UK had effectively borrowed at 0.1% interest rate and used QE.
“If an independent Scotland were to use the pound informally, as is current SNP policy for the short-term, such monetary financing would unlikely be available to it on the same terms," the IFS said.
“On the other hand, a separate Scottish currency, the SNP’s preferred option for the longer-term, could come under pressure if Scotland’s public finances were seen as unsustainable by the financial markets, pushing up the cost of any sterling-denominated debt obligations of the Scottish Government, households and businesses.
“None of this means that Scotland cannot afford to be independent…. [but] Scotland, like most of the UK outside of the South of England, currently has a significantly weaker fiscal position than the UK as a whole; and the starting point for an independent Scotland at any point in the next few years would therefore almost certainly be as a country with a sizeable structural deficit.”
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