Policies for an independent Scotland? Putting the Independence White Paper in its fiscal context

Executive Summary Fiscal backdrop • Using the Office for Budget Responsibility's (OBR's) latest forecasts for the UK's public finances and under the assumption that Scotland would inherit a population share of UK government debt, our calculations suggest that the net fiscal deficit in Scotland would be 5.5% of GDP in the first year of potential independence, 2016–17. This would be around 3% of GDP larger than that for the UK as a whole. • Exactly how Scotland's public finances will look in 2016–17 and how they would evolve in the years immediately after potential independence is uncertain – not least because of uncertainty about the level of revenues that will be derived from oil and gas production and the outcome of negotiations over what share of existing UK debt an independent Scotland would inherit. • However, if an independent Scotland wanted to achieve a sustainable medium-and long-term fiscal position, further tax increases and/or spending cuts would likely be needed after independence. It is against this fiscal backdrop that the policy proposals in the Scottish government's White Paper should be considered. comments, help and advice. They also gratefully acknowledge funding from the Economic and Social Research Council (ESRC) through the Centre for the Microeconomic Analysis of Public Policy at IFS (grant reference ES/H021221/1). The ESRC is supporting a programme of work addressing issues around the future of Scotland. One of the strands focuses on supporting new work at current major ESRC investments before and potentially after the referendum. Tax proposals • The White Paper rightly identifies the UK tax system as overly complex and inefficient. The general aspirations outlined for the tax system of an independent Scotland – such as simplicity, transparency and equity – are admirable but also uncontroversial. • The main revenue-raising measure is the intention to streamline tax reliefs and exemptions and reduce tax avoidance, although precise details on how this would be done are lacking. The Scottish government also plans to increase revenues by abolishing the transferable income tax allowance that will exist in the UK for some married couples from April 2015. • The three main tax cuts mentioned are to air passenger duty, employer National Insurance and corporation tax. The immediate cost of cuts to these taxes could be partially offset by positive knock-on effects on economic activity – for example, an increase in air travel and companies moving profits to Scotland from other jurisdictions. …