We’ve had a closer look at the Institute for Fiscal Studies report from this week.
Basically, the conclusion of the report is that if an independent Scotland continued to do exactly the same things over the next 50 years as the UK does now, it would have to grow its GDP by 1.9% to cover a predicted fiscal gap, while the UK would only have to grow by 0.8% to cover a similar gap. According to the IFS, this 1.9% shortfall would mean a 6% cut in services or a hike of 8% in income tax in an independent Scotland.
However, close reading of the small print in the IFS document highlights facts and forecast figures that appear to contradict the IFS’s argument and instead point to a situation where an independent Scotland would actually be in a similar fiscal position to the UK. Confused? Yes, so were we.
On page 40 the document states:
“The current SNP government has, however, suggested that it would cut defence spending from £3.3 billion to £2.5 billion which would reduce spending by around 0.5% of national income.”
(Our emphasis.) That gets the fiscal gap down from 1.9% of GDP to 1.4%.
Then on page 45, Footnote 31 confirms the viability of a Scottish oil fund:
“It is worth noting, however, that HM Treasury (2013) cautions against being too optimistic about the amount of future revenue that can be expected from such a fund. HMT modelling of an oil fund for an independent Scotland suggests that even if an oil fund were started in 2021–22, all oil revenues were contributed to the fund each year and the fund received a real return of 4% per year, in the very long run the fund would still only provide an annual return to the government of around 0.5% of national income.”
(Our emphasis again.)
This is interesting on two levels. Firstly, it indicates confirmation from HM Treasury that an oil fund is achievable and could provide long-term returns, even at a modest 4% rate of return (In fact, Norway’s sovereign wealth fund grew 14% last year, not 4%.)
And secondly, that the fund could provide an annual return of 0.5% of national income, which would reduce the Scottish fiscal gap to 0.9% of GDP. That’s almost at parity with the IFS’s predicted UK fiscal gap of 0.8%, without any additional cuts or tax increases. Where could Scotland find that last 0.1%?
From the Executive Summary in the IFS figures, we can establish that 0.1% of Scottish GDP is £146 million (at today’s prices). Scots currently pay £163 million per year to maintain Trident, and will be required in future to pay a population share of its £20bn replacement build cost, as well as ongoing maintenance costs of £100bn. Getting rid of it would save over £200m pa – more than enough to bridge the 0.1% gap and put Scotland in a stronger fiscal position than the IFS forecast for the UK.
But there’s another way out too.
Earlier this week we highlighted Sir Ian Wood’s recent report looking at the regulatory framework for the oil and gas industries. Sir Ian’s report concludes that stronger regulation would, by itself, realise an extra £200 billion over the next 20 years.
According to IFS figures, the 1.9% fiscal gap is equivalent to £2.78bn (in today’s prices), meaning that Sir Ian Wood’s £10 billion per year would not only eradicate this fiscal gap, but would leave over £7bn a year to play with. That would pay off an inherited per capita share of the UK national debt in little over a decade, and then allow a Scottish oil fund to grow rapidly.
Such are the possibilities of choice, should we elect to give ourselves them.