Bigger deficit forecast for an independent Scotland

Falling oil supplies and spending pledges would result in an £8.6bn deficit in Scotland’s first year of independence, according to reports from the Institute for Fiscal Studies think-tank.

The two reports, published on Wednesday, suggest that a Scottish government would find it tougher than previously thought to close the gap between income and spending, if the country votes in September to leave the UK.

Danny Alexander, the Treasury chief secretary, said: “An independent Scotland would have a larger deficit than the UK, meaning deeper cuts or tax rises than if Scotland stayed part of the UK.”

The IFS, said two factors had pushed up estimates of the Scottish deficit in recent months to 5.6 per cent of the country’s economy.

The first is an estimate by the Office for Budget Responsibility, the UK government’s fiscal watchdog, that taxes from North Sea oil and gas are likely to decline more quickly than expected over the next few years.

The second is that the tax rises and spending cuts announced in the Scottish government’s white paper on independence last year do not make up for their new spending commitments. Recent estimates from the OBR suggest income from oil and gas will fall from 0.4 per cent of the UK economy last year to 0.2 per cent by 2018, and 0.03 per cent in the next two decades.

However, those figures have been challenged by the Scottish government, which uses figures from Oil and Gas UK, the trade body, to assert that oil production will be higher than the OBR forecasts suggest.

The IFS also said spending promises in the white paper could leave Scottish voters out of pocket.

The institute said the pledge to provide 600 hours of free childcare to half of two-year-olds would cost £100m a year. The Scottish government’s long-term goal to provide 1,140 hours of free childcare to all children aged between one and four would cost £1.2bn.

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The IFS disagrees with the claim by Scottish ministers that the policy will cover its costs because it will allow more parents to work. The report calculates that the Scottish National party’s commitment to childcare and other measures, such as delaying a planned rise in the state pension age, will cost £1.2bn.

According to the IFS, that is £700m more than will be raised by defence cuts and the abolition of married couples’ tax breaks and the “shares-for-rights” scheme, whereby workers can exchange workplace rights for capital gains tax relief on up to £50,000 of shares.

The Scottish government said that “even on the IFS’s projections, Scotland’s public finance balance sheet in the first year of independence will be healthier than the UK’s was in the most recent financial year”.

It added that the think-tank’s forecasts for the public finances to 2018-19 are based on OBR projections for North Sea revenue “which assume that oil production remains static and that prices fall in the coming years.

“This is despite recent record levels of investment in the industry which, analysis by Oil and Gas UK suggests, will feed through to higher production in future years.”