Independent Scotland would face 'tough choices' on public spending

The Institute for Fiscal Studies says oil revenues would not be enough to cover existing commitments long-term.

Dennis O'Hare worked in the oil and gas drilling industry.

An independent Scotland would have to rein in public sector spending or face “starker” long-term economic prospects than the rest of the UK, according to the Institute for Fiscal Studies.

The think-tank compiled a report examining whether oil revenues would compensate for the higher average outlay on services such as care for the elderly and higher education.

Although independent oil revenues would have put Scotland in a relatively strong position in recent years, the IFS warned that the sector was prone to volatility and resources were likely to diminish over time.

It also noted that the funding gap between Scotland’s public finances and those for the rest of the UK has widened since the 1980s from around 2% to as much as 7%.

Alistair Darling, chair of the Better Together campaign, said the report set out in “stark terms” how dependent Scotland’s economy would be on the oil and gas industry.

He said: “North Sea oil is notoriously volatile and, according to the report, the only way that we would even come close to balancing the books in future would be by ensuring that what oil we have left is sold at the highest possible price.

“An economy paid for at the petrol pump is not what Scotland wants or needs.”

But the Scottish Government said the report showed Scotland was capable of paying its own way.

Finance secretary John Swinney said: “With the appropriate share of North Sea revenues, Scotland's public finances have been stronger than the UK's in every year from 2006-07 to 2010-11, with an average fiscal deficit lower than the UK's since 2000.

“With independence, Scotland will be able to face the difficult financial choices ahead from a stronger position than in the UK and use the full range of economic levers to support growth, boost revenues and deliver public services.”

The IFS said public spending in Scotland was about £1,200 higher per person than in the UK as a whole in 2010-11.

The main sources of higher public sector spending were the Scottish Government’s policy of free personal care for the elderly and not charging tuition fees for higher education, the IFS said.

The study found that if an independent Scotland had a geographic share of oil and gas revenues, the income would be enough to cover the higher level of public spending.

However, if the resources were distributed according to population, it may not have enough to cover its outgoings.

In the long term, it warned that the current spending plans “may not be sustainable in the face of volatile and, over the long run, probably diminishing North Sea revenues”.

The report went on: “That, alongside the same sort of demographic pressures that are affecting the UK and most other European countries, will force some choices on an independent Scotland.”

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