Scotland’s overspending problem

Mike Denham Research Fellow 13 October 2016
Following the EU referendum result, the Scottish government announced that Scottish independence was once again “on the table”. However, most objective analysis shows that Scotland today couldn’t afford independence, with the loss of English subsidies entailing a huge and unsustainable fiscal deficit. In short, the country is living beyond its means.
 
Part of the problem is the collapse in North Sea revenue. But more fundamentally, Scotland’s public spending is excessive and beyond the capacity of its economy to support. The renewed call for independence has brought the issue into sharp focus, but overspending is a long-standing problem that needs to be tackled irrespective of the independence question. 
 
This report examines the current state of Scotland’s public finances and concludes: • At £14.8bn Scotland’s fiscal deficit last year was 9.5 per cent of Scottish GDP.  • That was over twice the UK deficit, and higher than any other member of the EU, including Greece. • Despite sometimes record oil prices, Scotland has run a deficit every single year since devolution in 1999. The deficit has deteriorated over recent years, and is now running even higher than during the aftermath of the 2008 Crash. • Scotland’s North Sea revenues have collapsed by £9.6bn since 2011-12, equivalent to six percentage points of GDP. Falling production means that revenue loss will never be recovered even if oil prices return to previous highs. • Despite this collapse in revenues, Scotland’s public spending remains far in excess of England’s. Spending per head is 20 per cent higher, equivalent to around 6 per cent of Scotland’s GDP. This is sustained not by the Scottish economy, but by the continuing subsidy from English taxpayers via the Barnett Formula.
• To become and EU member, an independent Scotland would be forced to tackle its deficit. It would be subject to the rule that any deficit over 3 per cent of GDP is deemed excessive, requiring an agreed programme of fiscal retrenchment.

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