SCOTLAND'S declining population could benefit the Scottish Government’s budget if it remains part of the UK, a report has said.

However, if the country votes to become independent, then it will need to address the issue in order to strengthen its economic position. 

Scotland's population is projected to fall by 16% – 900,000 people – over the next 50 years, while the number of people living in the rest of the UK is forecast to remain broadly flat, the Scottish Fiscal Commission has said.

Experts have now said a smaller population would equate to Scotland’s economy shrinking by 0.2% less per year on a per-person basis compared to the rest of the UK.

But current constitutional funding agreements mean this would not hinder Scotland’s ability to manage its finances.

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A briefing paper by the Institute for Fiscal Studies (IFS) said that instead, a smaller population could see more funding for each person in the country.

The Barnett formula – a measure used by the Treasury to determine the annual block grants given to devolved governments – does not fully account for changes in population when allocating funding.

Scotland’s fiscal framework protects the government from the effects of a falling population on devolved taxes, meaning a lower population would equate to increased funding per person, the IFS said.

It leaves the Scottish Government with tricky decisions when considering policies aimed at attracting migrants and boosting birth rates.

It may boost the economy and tackle labour and skills shortages but there would be less to spend per person, the report said.

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That is in contrast to independence, where Scotland’s public finances would be stronger if “population decline could be stemmed”.

David Phillips, associate director at the IFS, said: “Most people would probably assume that a large projected fall in the Scottish population over the coming decades would damage the Scottish Government’s finances by undermining revenues.

“However, under current constitutional and funding arrangements, that’s not true: a smaller population means more funding per person from the UK Government.

“This has important implications for the policy trade-offs the Scottish Government faces as it seeks to both support the economy and improve the long-term sustainability of its budget.

“Successfully attracting more migrants and boosting birth rates would benefit the economy, but may make managing the Government’s budget harder than easier as funding per person from the UK Government is cut.

“This stands in contrast to the situation the Scottish Government would face under independence, where boosting immigration and birth rates would not only help address labour and skills shortages, but also address the long-running fiscal challenges facing the country.

“However, it is worth remembering those fiscal challenges would likely be significantly greater in an independent Scotland unless it could boost growth.”

A Scottish Government spokesperson said: “The projections for Scotland’s falling population over the next 50 years starkly illustrate the social and economic costs of the Scottish Government not being in control of immigration policy – something that has been hugely exacerbated by Brexit.

“Independence will give Scotland the full range of economic and other policy tools to take decisions based on our own needs, and will allow us the chance to replicate the success of many neighbouring countries which are more prosperous, productive and fairer than the UK.”