The chart above, from a paper by the Institute of Fiscal Studies, shows how rapidly Scotland’s public finances could deteriorate if it votes for independence. Public sector net borrowing, the amount the country has to borrow on top of what it raises in tax revenues, is projected to leap from around 4% in a decade to over 10% by the middle of the century. This would send public debt rocketing up to 200% of GDP.
That’s a larger hole than the one Greece is in.
And here’s the problem with that, according to the IFS:
Although it is uncertain exactly what interest rate an independent Scottish government would be able to borrow at, it seems implausible that any small economy that was reliant on foreign investors to help finance its public deficit could continue to borrow at a [UK average] rate of 5% if public sector net debt really was on course to approach 200% by the middle of the century.
A higher deficit would lead to a vicious cycle of increased interest payments forcing the country to borrow more and worsening its budget position further.
Even worse news for the pro-independence campaign is that the key drivers of this trend are structural factors that Scottish policymakers can do little about. Firstly, Scotland is ageing at a faster pace than the rest of the U.K., meaning that costs associated will old age (in particular pensions and healthcare) are likely to rise faster while the tax base from which the government can raise money to fund them will be shrinking.
Of course, if an independent Scotland adopted a more liberal immigration policy it would be possible to offset this problem. Alex Salmond has already suggested he would try to increase net migration to the country after independence. But even under an optimistic scenario the trajectory remains the same.
Perhaps more worrying for the Yes vote are projections for North Sea oil revenues. In July this year the Office for Budget Responsibility, the U.K. government’s independent economic advisory body, projected oil and gas revenues are set to decline sharply over the next few years just as an independent Scotland would be trying to get onto its feet.
What this means is that, although many Scots will be voting for Independence in order to loose themselves from the austerity policies of the current Coalition government in the U.K., the reality is that an independent Scotland may well have to tighten its belt at an ever greater pace in order to have sustainable finances. Even under the most optimistic of the IFS’s assumptions this would mean higher taxes and lower spending than south of the border.
Rather than throwing off the yoke of Westminster, Scotland may simply be replacing it with a heavier one from Edinburgh.
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