Would an independent Scotland 'start out with a large budget deficit'?

"It's clear that an independent Scotland would start life with a large deficit. It would need to get that down, and that would mean difficult choices." - David Phillips, an associate director at the Institute for Fiscal Studies (IFS), April 26, 2021.

DOORSTEP ANSWER:

No-one can say what Scotland’s debt or deficit might be until after the independence negotiations. If we refuse to take on responsibility for buying Trident and the like, our starting debt might be zero – like owning the house but having no mortgage.

WHAT THE IFS SAID:

The Institute for Fiscal Studies (IFS) is an independent economic research body which specialises in taxation and public spending. It was founded in 1965 by a group of right-wing London bankers and investment managers who wanted to criticise the economic policy of the then Labour Government.

READ MORE: Scotland is rich enough to become independent, think tank says

In a public briefing ahead of the May 6 Holyrood elections, the associate director of the IFS, David Phillips said an independent Scotland would start life with budget deficit "substantially higher than the rest of the UK" as a percentage of GDP, and therefore would face difficult choices to bring this down.

Phillips was careful to note: “That doesn't mean Scotland can't afford to be independent. Scotland's a relatively rich country.”

But he warned that an indy Scotland “would need to make sure that it cut its cloth to fit the size of its own purse, rather than having fiscal transfers from the rest of the UK".

DOES SCOTLAND HAVE A SERIOUS DEFICIT?

Few countries run a budget surplus and certainly not for any length of time. Over the past 61 years, the UK has run a budget surplus in only eight occasions. Three of those years were under Gordon Brown but largely because he sold off much of Britain’s gold reserves.

Governments have the right to levy taxes and so can borrow with relative impunity. The important question is whether they run an excessive annual deficit. Too much borrowing pushes up interest rates and threatens confidence in the currency.

Phillips is claiming that an independent Scotland would start with a public deficit that was unsustainable and would therefore require spending cuts or higher taxation, or both.

READ MORE: SNP, Labour and Tory manifestos 'lack credibility', think tank claims

He claims that the rise in UK spending as result of Covid allied to lower North Sea tax revenues would mean an independent Scotland would inherit a massive public deficit in its annual accounts. One estimate – published last August on the IFS website – runs to 26-28 per cent of GDP.

The first thing to say is that the notional Scottish deficit after independence cannot be calculated beforehand because it will depend entirely on the deal agreed between Holyrood and Westminster. Currently, the Scottish Government runs a modest annual budget surplus. It is forbidden by the devolution settlement to spend more than it receives from the Treasury or raises in taxation.

The notional post-independence deficit calculated by the IFS is based on allocating a share of the existing Conservative government's deficit to Scotland.

This is calculated using estimations of Scotland’s supposed benefit from Westminster spending, including defence and interest on the National Debt. An independent Scotland may not want to continue with the spending priorities of the current UK Government (e.g. replacing Trident) and so those obligations disappear from any notional post-indy deficit.

Again, the extent to which Scotland agrees to continue to fund the current UK National Debt – if at all – affects any post-indy deficit.

None of these factors are considered by the IFS. In these circumstances, Phillips's comments on the fiscal position and economic policy of a future Scottish are speculative.

IS A NOTIONAL SCOTTISH DEFICIT LIKELY TO BE BIGGER THAN ELSEWHERE?

Much pro-Union media interest is focused on the supposed excess budget deficit in Scotland. However, the notional Scottish deficit is not unique when compared to English regions.

In fact, of the 12 UK regions and nations, nine had notional deficits in 2019 (before Covid). The three surplus regions were London and its surrounds. Of the other regions, the English West Midlands and North West actually ran a bigger notional deficit than Scotland.

This is a normal occurrence statistically (see: ONS County and regional public sector finances, published annually). It suggests - somewhat unreasonably - that everywhere in the UK outside of London is “subsidised” by the metropolitan centres.

The reality is that the data is biased because most UK most taxes are bookmarked in London though generated elsewhere in the UK. Phillips's constant reference to Scotland’s notional deficit being higher than the UK’s is a statistical distortion.

IS INDY SCOTLAND'S FISCAL POSITION LIKELY TO NECESSITATE SOME AGGRESSIVE AUSTERITY MEASURES?

If we look at gross debt (2019, pre-Covid) the EU average ran at just under 80 per cent of GDP. Indy Scotland will start with a gross debt of anything between zero and its pro rata share of UK debt – which was only a little higher that the EU average for 2019 and far less than France, Italy or Spain.

Even taking the UK figure, Scotland’s gross debt (assuming we had any) would at worst be equivalent to Austria’s. That does not suggest the need for an instant, crushing austerity. If the gross debt after independence is nearer zero, the global financial community will likely be clamouring to buy Scottish government bonds.

WHERE DOES COVID COME IN?

Clearly, the pandemic crisis has forced governments to abandon austerity measures and spend as necessary. Every EU member state except Denmark has breached the Community’s deficit rules. In such circumstances, it is odd Phillips should preach austerity to Scotland when other industrial nations have decided that fiscal loosening is the order of the day.

Finally, Phillips claims that "fiscal transfers from the rest of the UK" are subsidising Scotland and (presumably) would have to be replaced from somewhere after independence.

READ MORE: SNP to question Tories on Covid contracts cronyism scandal

In fact, every region and nation of the UK (including London) is being “subsidised” during the pandemic, as UK output and taxes fall while NHS and support payments soar.

The financial hole has been filled by the Bank of England printing money for Westminster to spend (or pass to Holyrood). In other words, the UK “deficit” Phillips wants to pass on to Scotland is not a real deficit (i.e. borrowing) but an accounting procedure between one part of the UK state and another.

On independence, one would expect that internal bookkeeping to be cancelled as far as Scotland is concerned.

FACT CHECK RATING:

The IFS analysis of Scotland’s deficit and debt post-independence is based on suppositions which might never apply.