Scotland referendum 2014: the impact of independence on UK public finances

Independence is not without risk for the UK: tax competition could lead to lower revenues, and uncertainty around debt could affect the UK's credit ratings negatively. The possibility that the Scottish Government will not take a full share of public sector debt if Scotland does not get a fair share of assets also remains.

However, it is unlikely that independence would have a significant impact on the public finances of the UK. The terms of independence are not as crucial to the UK as they are to Scotland, and although the scale of public finances would be smaller, the net effect to the UK Exchequer from losing the nation could well be negligible.

Public spending and revenues

Differences exist between the spending and revenues of Scotland and the rest of the UK. The terms of independence may well determine the size of any differences, with Scotland in particular having a big interest in the division of North Sea oil and gas revenues.

Graph 1: Lower spending in the rest of the UK than in Scotland, £ per head, 2012/13

(link to non-image version of graph 1)

Spending

In 2012/13, public spending in Scotland was over £12,200 per head, somewhat higher than the £10,900 spent in the rest of the UK.
Scotland's higher spending is attributed, by the Scottish Government, in Government Expenditure & Revenue Scotland 2012-13, to lower population density, a larger public sector, higher demand and need for services.

In its report, Fiscal sustainability of an independent Scotland, the Institute for Fiscal Studies highlights higher spending on public services, rather than tax credits and benefits, as the main reason for higher public spending.

Onshore revenue

Estimates from the Scottish Government suggest that onshore revenues in Scotland and the rest of the UK are similar per head of population. The picture differs once offshore revenues are added.

Differences between onshore revenues largely balance out. The rest of the UK raises a greater proportion of revenues from income tax, and taxes on wealth and property, whilst Scotland is estimated to raise more from VAT and taxes on alcohol and tobacco.

Graph 2: Onshore revenues, £ per head, 2012/13

(link to non-image version of graph 2)

North Sea oil and gas: revenue

Negotiations over the division of North Sea oil and gas revenues will be more important to the finances of an independent Scotland than to the UK.

Based on North Sea revenues in 2012/13, even if the optimal outcome for the UK were negotiated by its Government, North Sea revenues would only be worth around £100 per head more than if the worst outcome were reached. The very best outcome for Scotland could be worth in excess of £1,000 per head.

If North Sea revenues were anywhere approaching their mid-1980s peak then this issue would be more significant for the UK. A return to such levels seems unlikely: the Office of Budget Responsibility has forecast further decreases in the coming years, although forecasting such revenues is notoriously difficult.

Graph 3: North Sea revenues, % of all UK revenues, 1968/69 – 2018/19

(link to non-image version of graph 3)

Graph 4: Total revenues, allocating North Sea revenues by population and geography, £ per head, 2012/13

(link to non-image version of graph 4)

North Sea oil and gas: costs

A House of Lords Select Committee Report on The Economic Implications for the UK of Scottish Independence (PDF) has indicated that over the next 30 years decommissioning of oil and gas installations may cost in the region of £30-40 billion, with reduced tax revenues set to contribute around 50% of the costs in the form of tax relief.

The UK Government may be required to foot some of this bill: the SNP has stated that as the UK Government benefited from past tax revenues, so should it contribute to future decommissioning relief.

Public sector debt

UK Public sector net debt currently stands at around £1.3 trillion, or 75.8% of GDP. By 2015/16 this is forecast to have risen to over 78% of GDP.

The UK Government has announced in its policy paper - UK debt and the Scotland independence referendum that it will honour the terms of public sector debt in the face of independence, and would expect to be reimbursed by an independent Scotland for holding its share.

The SNP has argued that Scotland would be likely to take a smaller share of UK debt if a currency union were not established, as highlighted on the BBC's page Scottish independence: The currency debate, claim by claim. If Scotland did not take any of the UK debt, the UK would be left with debt of around 85% of GDP.

Providing the Scottish Government does take a share of UK debt, as The Telegraph article "SNP retribution plan over pound" shows some commentators believe it will, the biggest threat independence poses to UK debt is an increase in the ratio of debt to GDP bringing about a slower return to the highest level of credit rating.

The credit ratings agency Fitch Ratings has stated that the UK Government's plan for sharing the debt may slow its return to the highest level of credit status – AAA – as honouring the debt, “would lead to a one-off increase of 9.5% of GDP in the UK gross public sector debt ratio as Scotland was stripped from UK GDP from 2016.”

However this view is not universal amongst such agencies, with The Scotsman newspaper quoting Moody's saying that the credit impact to the rest of the UK “is likely to be limited, given the small size of Scotland's economy relative to rUK”.

Tax competition

Independence will bring Scotland almost complete autonomy over its tax system. Currently Scotland has autonomy over some areas of taxation, but independence would significantly increase the level of freedom.

In addition cross-border movements of goods and services, people and capital between Scotland and the UK will present opportunities to compete over tax revenues.

Similarities of language, law, land and, potentially, currency may lead policymakers on either side of the border to believe that taxpayers see the nations as substitutable and so could be lured across the border with better tax conditions.

The SNP has signalled its intention to reduce corporation tax 3% points below the UK rate, and reduce air passenger duty by 50%. Assuming that the UK does not respond on corporation tax, it would face a real challenge in preventing companies from artificially or otherwise shifting profits north of the border.

The Institute of Fiscal Studies "Taxing an independent Scotland" (PDF) has warned that competitive tax policies “could leave [Scotland and the UK] raising less revenue than if the countries cooperated to set rates at what would be best for them collectively”.

However, wider aggressive tax competition may be fairly unlikely in the short to medium term. The expected ongoing squeeze on public finances in both nations will not provide ideal conditions for significant tax decreases.

Accessible data tables

The following four graphs are the table versions of the illustrated images which exist higher up the page. The table format has been created to assist people who require non-image access to the data.

If you would like further assistance or have feedback about accessing this information, please email papers@parliament.uk.

Graph 1: Lower spending in the rest of the UK than in Scotland, £ per head, 2012/13

Graph 2: Onshore revenues, £ per head, 2012/13

Graph 3: North Sea revenues, % of all UK revenues, 1968/69 – 2018/19

Graph 4: Total revenues, allocating North Sea revenues by population and geography, £ per head, 2012/13