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Outlook for Scotland's Public Finances and the Opportunities of Independence

Outlook for Scotland's Public Finances and the Opportunities of Independence

Wednesday, May 28, 2014

ISBN: 9781784125509

This report provides a summary of recent trends in Scotland’s public finances and an analysis of the fiscal position Scotland is likely to achieve in coming years.

Executive Summary

This report develops and builds on the analysis of Scotland’s public finances in 2016-17 provided in Scotland’s Future by demonstrating how they could evolve over a range of time periods and under different assumptions about the division of assets and liabilities held by the UK Government and wider public sector, and Scotland’s economic performance.

The key findings are:

Over the five years to 2012-13 Scotland’s public finances, despite showing a fiscal deficit, have been relatively healthier than those of the UK as a whole. This is due to Scotland generating an estimated 9.5% of UK public revenues whilst receiving 9.3% of total UK expenditure.

Scotland’s fiscal position in 2016-17 will depend in part on the outcome of negotiation over UK public sector assets and liabilities. The analysis in this report is based on three different scenarios about the divisions of UK public sector net debt (per capita share, historic share and zero share) to reflect some of the potential outcomes. The results show that:

o Scotland’s estimated debt to GDP ratio in 2016-17 is forecast to be lower than the UK’s under all three scenarios.

o Scotland’s current budget balance, the difference between public sector revenue and current expenditure is also estimated to be the same as, or lower than, the UK’s in all three scenarios.

o Scotland’s net fiscal balance, the difference between public sector revenue and total public expenditure (i.e. current plus capital expenditure) is estimated to be better than the UK’s when estimated on a zero debt share and in line with the UK’s when estimated using a historic or per capita share of UK debt.

The Scottish Government envisages that a negotiated settlement for debt payments would ultimately lie within the bounds of a per capita and zero share range. This will not only reflect Scotland’s historic contribution to the UK public finances, but also the likelihood that Scotland would be unlikely to want (or need) to take on a per capita share of certain existing UK assets (e.g. defence and non-Scottish physical assets).

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In the years following independence, the Scottish Government will have responsibility for setting the overall levels and composition of public spending and taxation, ensuring that the public finances are sustainable and support economic growth.

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Chapter three demonstrates how Scotland’s net fiscal balance could evolve in 2017-18 and 2018-19 under different assumptions about the level of nominal growth in current spending.

The results imply that, assuming 3% nominal growth in current spending during 2017-18 and 2018-19, Scotland’s net fiscal balance could fall to 2.2% of GDP in 2018-19. Alternatively, assuming that public spending grew 1% in nominal terms, Scotland’s net fiscal balance is estimated to fall to 0.9% of GDP by 2018-19.

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The Scottish Government’s preference is for growth of around 3% between 2016-17 and 2018-19. This contrasts with the UK coalition’s preference for growth closer to 1% (i.e. a real terms cut)

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If future governments were successful at increasing Scotland’s economic performance this would have a positive impact on the country’s public finances.

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Such effects are potentially significant. As an illustration, the analysis in Chapter four indicates that if Scotland was able to increase its population, and close some of the gap in its employment and productivity rates with the top performing countries in the OECD, it would boost tax revenues year on year. After thirteen years it could provide an additional boost to tax receipts of over £5 billion a year.