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IFS Examines Impact Of Scottish Tax Devolution

by Robert Lee,, London

13 March 2015

Full fiscal autonomy for Scotland would likely involve substantial tax rises or spending cuts, according to new research from the Institute for Fiscal Studies (IFS).

In a new briefing, the IFS notes that "full fiscal autonomy" – under which all taxes and the majority of spending would be devolved to Scotland – would mean that the Scottish Government would have to borrow if its spending were greater than its revenues. It would also have to bear the risk of volatile North Sea and other tax revenues.

The IFS projects Scotland's deficit to be 8.6 percent of gross domestic product (GDP) in 2014-15 and eight percent of GDP in 2015-16. The deficit for the UK as a whole is expected to be five percent in 2014-15 and four percent in 2015-16. The IFS anticipates that this gap would be larger if oil prices remain at current levels. The Institute points out that, as Scotland's onshore economy and tax base are much smaller than those of the UK as whole, a fall in North Sea revenue has a much larger impact on Scotland's fiscal position.

The IFS said that if Scotland were fiscally autonomous in 2015-16, its budget deficit would be around four percent of GDP higher than that of the UK as a whole. In cash terms, this is equivalent to a difference of around GBP6.6bn (USD9.8bn).

The Scottish Government has previously suggested policies to boost growth, including cuts to corporation tax and expanding assistance for working parents. According to the IFS, the immediate effect would be to weaken the Government's finances. In addition, it said it is not clear that in the longer term the effects on growth would be enough to pay for such tax cuts and spending increases.

This week, the Scottish Government released spending and revenue figures for 2013-14. It said that Scotland's tax take for the last financial year was GBP400 per head higher than the rest of the UK. Even with a fall in oil revenues, total public sector revenue is estimated at GBP54bn, and the budget deficit was 6.4 percent of GDP.

First Minister Nicola Sturgeon said: "We have the capacity and the resources to grow our economy, address inequalities, grow small businesses, and put more people back to work. But to do that we need more economic powers and the ability to protect Scotland against the anticipated GBP14.5bn in cuts that Westminster plans over the course of the next parliament. Going forward, these figures illustrate once again the need for the Scottish Government to have full control of job-creating powers."

"If we held the levers of our economy in our own hands and were able to invest according to our own priorities, we could make a very significant positive contribution to growing our economy."

TAGS: tax | small business | business | public sector | gross domestic product (GDP) | budget | corporation tax | United Kingdom | tax rates | revenue statistics | Scotland

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