Ross Stupart

Written by: Ross Stupart

Ross Stupart

Partner

Could Scotland sustain itself financially?

Regardless of your viewpoint, the Government Expenditure and Revenue Scotland statistics show a slight improvement in the deficit, but it still sits at £12.6bn. Although there has been a slight improvement in Scotland, it looks like the UK has moved from a negative to positive fiscal position as the Conservative Government’s austerity programme has reduced the reliance on public sector borrowing. The Scottish government has been a lot less aggressive with austerity measures throughout this time hence the Scottish deficit reduction not keeping pace with the UK.  

Hypothetically if all powers were devolved to Scotland tomorrow, how would Scotland manage its finances against this backdrop? First, it would lose the benefit of a block grant from the UK government operated under the beneficial calculation of the Barnett Formula, so there would be an additional shortfall circa £21bn that would have to be covered by new revenue raising powers.  

Cutting services will not be high on the agenda so the government could look to borrow, while borrowing is cheap, to stimulate Scotland’s economy. This would add to the deficit but could reap long term benefits if the borrowing translated into infrastructure investment that served as a catalyst for economic growth rather than shoring up the budget required to maintain current service levels. 

The only other remaining option is through taxation. But with low unemployment the critical mass of taxpayers is unlikely to change significantly so that would mean that income taxes would need to rise. The Scottish Government would have to take a very close look at corporation tax and VAT policies to identify a strategy that would raise sufficient revenue but ensure Scotland remained competitive with the rest of the UK and Europe. 

However, Scotland already applies the higher rate of income tax at a lower income level than the rest of the UK and has the highest top rate of income tax, so further increases in income tax would create increased divergence and may encourage some higher earners to migrate south of the border, or in the case of privately owned businesses, owners could opt to take dividends rather than a salary to avoid the higher income tax rates in Scotland.  

So, Scotland could raise some tax revenues but even with drastic measures through increased taxation, there would be insufficient receipts to balance the books and the deficit would still be worryingly high. Unless corporation tax payable by industries such as oil and gas, or growing sectors such as tech and space increase significantly it is difficult to see where a shortfall of this magnitude can be made up.

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