IFS: Independent Scotland faces conflict over taxes

AN INDEPENDENT SCOTLAND faces a tension between pressure to lower its tax rates and the need to fix its public finances, the Institute for Fiscal Studies has warned.

The institute noted there is “plenty of scope” for Scotland to improve its tax system, but a newly-independent nation would need to take into account factors such as a more equal income distribution among its population; largely uncongested roads; tax competition with the UK, with cross-border shopping impacting on corporation tax and excise duties; a strong case to focus taxes more on immobile tax bases such as property.

At the same time, the think tank suggested, Scotland would face fiscal pressures at least as strong as those faced by the UK as a whole, and might want to consider tax increases as a possible response.

Currently, Scottish tax revenues per person are very similar to those in the UK as a whole if North Sea oil revenues are allocated in proportion to population, but significantly higher if oil revenues are allocated geographically. Oil revenues, though, are volatile and as such are unreliable.

Previous IFS research has found that £2.5bn of tax rises or spending cuts in today’s terms would be needed during 2016/17 and 2017/18 to match the UK government’s plans. If a Scottish government also wanted to offset the decline in oil revenues by 2017/18 forecast by the Office for Budgetary Responsibility, another £3.4bn would be needed.

Stuart Adam, a senior research economist at the IFS and an author of the report, said: “Independence would give Scotland an opportunity to design a much more efficient tax system than the one we live within the UK. But to do so would require tough political decisions, and independence does not give any government a completely free hand. On the one hand, tax competition will create pressure to reduce tax rates. On the other an independent Scotland will need to look to fill a substantial fiscal gap.”