Scotland’s fiscal deficit could be as high as 25% of GDP as a result of the pandemic, a think tank has warned.
In an analysis published on Thursday, the Institute for Fiscal Studies (IFS) said spending could have outstripped revenue north of the border by between 22% and 25% in 2020-21, an increase from 8.6% the previous year.
While the deficit is not as large as previously projected by the IFS, nor does it reach the same levels as in Wales or Northern Ireland, the figure for the UK as a whole is just 16%.
Higher levels of public spending in Scotland are, according to the IFS, paid for from fiscal transfers from the south of England.
David Phillips, an associate director at the think tank, said: “Our latest projections for Scotland’s implicit budget deficit in 2020-21 are lower than those we made last summer, reflecting the fact that the deficit for the UK as a whole is now estimated to have been not quite so high as then feared.
“But the gap between Scotland and the UK as a whole is very similar and is structural rather than cyclical. Even if the UK’s public finances were in balance we would expect Scotland’s deficit to be around 6% of national income.”
Under the current trajectory, the IFS forecasts Scotland’s deficit to rebound in a similar way to the UK’s, dropping to just under 10% in 2025-26.
The economic side of the debate around Scottish independence regularly focuses on the deficit, which critics say is too high and would require austerity measures in a newly-independent Scotland to rectify.
The IFS concurs, with its analysis saying: “The fiscal transfers made to Scotland, Wales and Northern Ireland (and indeed the North and Midlands and of England) are normal within a fiscal union – but would cease under independence or ‘full fiscal autonomy’.
“To offset the end of these fiscal transfers, some combination of tax rises or spending cuts would be needed, unless faster economic growth could be quickly delivered in an independence or full fiscal autonomy scenario.”
But the think tank adds: “None of this means that Scotland cannot afford to be independent, nor that there aren’t a range of opportunities for better policy to improve performance and better address Scottish needs and preferences.
“If such policies can be developed and implemented, this could in the longer term allow more to be spent on public services and more to be kept in Scottish people’s pockets.
“The same is true for Wales and Northern Ireland – although the extra growth that would be required to offset the loss of fiscal transfers from (the south of) England in these cases would be several times greater.
“And saying you are going to boost economic performance through better policy making is, of course, easier than designing and implementing the necessary policies.”
Finance Secretary Kate Forbes said: “This latest update from the IFS shows that with the right plan in place, Scotland’s economy could grow faster – but deep Tory cuts to Scotland from Westminster risk destroying any progress made by the Scottish Government.
“Only the SNP has a track record in office of using the Scottish Parliament’s current financial powers – and only the SNP has the serious plans required to drive the post-pandemic recovery which is needed.
“On the finances of independence, as the IFS has said, Scotland is a rich country but we don’t yet have full control over those many resources.
“The Tory response to the last recession was to impose a decade of austerity on Scotland and Labour did nothing to stop it, and then at the height of the pandemic they imposed a hard Brexit on Scotland against our will.”