Independent Scotland May Need 15% Public Spending Cut, IFS Says

An independent Scotland may need to reduce public spending by 15 percent in the two years after quitting Britain if it wants to keep its budget deficit in line with current U.K. plans, according to a report published today.

Scotland would have to cut spending by 6 percent, or 2.5 billion pounds ($4 billion), by 2017-2018 to match U.K. spending plans, the Institute of Fiscal Studies said. Further cuts of 3.4 billion pounds may be needed if forecasts of declining oil and gas revenues are accurate, the IFS said. The alternative would be to raise taxes or cut benefits.

“Spending on public services is substantially higher per person in Scotland than in the U.K. as a whole,” David Phillips, author of the report, said in an e-mailed statement. “Even with cuts to defense and aid spending, an independent Scotland may need to cut spending on other services or raise taxes by more than if it remained part of the U.K.”

Independence is the flagship policy of the semi-autonomous Scottish government run by the Scottish National Party. A referendum on whether Scotland should quit the U.K. is to be held on Sept. 18 next year. Scottish First Minister Alex Salmond wants an independent Scotland to keep the pound. Chancellor of the Exchequer George Osborne said in April that a formal currency union was highly unlikely.

Cuts of 5.9 billion pounds were equivalent to 15 percent of public spending in 2011-2012, when spending per head on public services was 17 percent higher in Scotland than in the U.K. as a whole, the IFS said.

Even if North Sea revenue turns out to be higher than Office of Budget Responsibility forecasts, an independent Scotland would be “ill-advised” to cut spending or raise taxes by less than if it remained part of the U.K., the IFS said.

“It will need to build a strong fiscal position in order to gain credibility in the financial markets,” the IFS said.

To contact the reporter on this story: Peter Woodifield in Edinburgh at pwoodifield@bloomberg.net

To contact the editor responsible for this story: Douglas Lytle at dlytle@bloomberg.net

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