Embargoed: 00:01 Sunday 21 March 2021
Ahead of the launch of the Scottish election campaigns, the TaxPayers’ Alliance has found that an independent Scotland would need to raise the basic rate of income tax to 46 pence in the pound to pay for its current level of spending. With a second referendum possible, the paper analyses the fiscal position of an independent Scotland in regards to spending, revenue and deficit.
Analysis reveals the current rate of Scottish spending, which at £11,247 per head is 20 per cent higher than England’s, could not be supported without huge tax rises, or a significant reduction in public spending. Holyrood would need to increase taxes by at least 10 per cent of GDP to balance the books and maintain this level of spending, the same as raising VAT to 49 per cent. Alternatively, to bring spending down, cuts could fall on areas where provision is currently more generous than in England, such as free university tuition.
The research also found that due to this high level of spending, the Scottish deficit is 14 times higher than the European average, at 8.6 per cent of GDP. It is also the highest of any OECD country. In any future independence settlement, Scotland may also be liable to take a share of the UK’s existing debt, leading to liabilities of around £300 billion, or twice the size of Scotland’s GDP.
An independent Scotland would start life with new economic freedoms, but also a fiscal deficit considerably larger than that of any other European country, with high levels of public spending and tax revenues that fall well short. The reality of Scotland’s current and future fiscal position must be clear, to both those who want Scotland to leave the UK and those that support the status quo.
- Scotland's fiscal deficit remains high and excessive by international standards: at 8.6 per cent of GDP last year, it was over 14 times the Euro area average, and higher than any individual OECD member country anywhere.
- The position has deteriorated even further through the covid-19 pandemic, with this year’s deficit likely to reach 25 per cent of GDP, and set to remain at or above 10 per cent until at least mid-decade.
- With Scandinavian levels of spending, to balance the books an independent Scotland would need to increase taxes by at least 10 per cent of GDP. That would be equivalent to raising the basic rate of income tax to 46 pence in the pound or VAT to 49 per cent.
- Scotland's general government financial deficit has recovered more slowly than countries that were worse affected by the 2008 crash. This includes Greece, Ireland and Spain.
- The deficit is driven by public spending that has long been excessive relative to both tax revenues and spending levels elsewhere in the UK: Scotland’s per capita public spending remains around 20 per cent higher than England's.
- North Sea revenues are not a realistic solution: Scotland ran a deficit even when oil prices exceeded $100 per barrel, and the oil fields are now fast depleting.
- An independent Scotland could attempt to fund its deficit by borrowing, but any workable independence agreement with the UK would require Scotland to carry its share of existing UK government debt obligations. Scotland's share of the UK government's total net liabilities – including borrowing – would be around £300 billion, or roughly twice the size of its GDP.
- Debt markets would demand a robust fiscal consolidation plan, backed by an immediate and credible demonstration of intent, with significant spending cuts and/or tax increases. The current Scottish government’s preference for Scandinavian levels of social spending would likely mean an emphasis on tax rises.
- 44 per cent of Scottish income taxpayers already pay higher rates than elsewhere in the UK. Further increases on the scale required would punish taxpayers and seriously undermine economic growth prospects.
John O’Connell, chief executive of the TaxPayers' Alliance, said:
"Scottish taxpayers expect their leaders to get to grips with the reality of Scotland’s fiscal position.
“An independent Scotland would start life with new economic freedoms, but also retain a fiscal deficit considerably larger than any other European country, with high levels of public spending and tax revenues which fall well short.
“Politicians need to have an honest debate about the public finances, whatever their position on the Union.”
TPA spokesmen are available for live and pre-recorded broadcast interviews via 07795 084 113 (no texts)
Media Campaign Manager, TaxPayers' Alliance
24-hour media hotline: 07795 084 113 (no texts)
Notes to editors:
- Founded in 2004 by Matthew Elliott and Andrew Allum, the TaxPayers' Alliance (TPA) campaigns to reform taxes and public services, cut waste and speak up for British taxpayers. Find out more at www.taxpayersalliance.com.
- TaxPayers' Alliance's advisory council.
- The TaxPayers’ Alliance takes no view on Scottish independence or the timing of a second independence referendum.