Scottish Fiscal Sustainability Report – immediate response

David Phillips, head of devolved and local government finance at the Institute for Fiscal Studies said: 

“Today’s Scottish Fiscal Commission (SFC) report highlights the fiscal challenges facing the Scottish and UK governments over coming decades as populations age and public service costs rise.  

Under current constitutional arrangements, Westminster’s tax and spending choices will remain a key driver of the Scottish Government’s budget. If the UK government only meets half the projected spending increase through tax rises, the SFC projects an annual ‘funding gap’ for the Scottish Government equivalent to almost 10% of its budget by 2050 – over £5 billion in today’s terms. Larger tax increases would reduce this gap but mean higher bills for households and businesses.  

The SFC’s analysis therefore makes clear that households either side of the Scottish border will likely face substantially higher taxes or a state that does relatively less in the decades ahead. An independent Scotland would face trade-offs at least as difficult, unless it could significantly boost economic growth. And growing international tensions – on trade and defence – will only add to the fiscal pressures facing Scotland, the UK and countries across the world.  

The SFC’s report also outlines opportunities and risks related specifically to the health of Scotland’s population.   

Encouragingly for Scotland, health spending – an area of spending likely to see particularly big pressures in coming decades – constitutes a smaller fraction of overall spending than in England and Wales. This means the so-called ‘Barnett squeeze’, whereby funding per person in Scotland grows less quickly than in England, will bite less hard than it otherwise would, with more scope to reallocate funding from other services to healthcare.  

The report also shows that improving health in Scotland could ease fiscal pressures to the tune of billions of pounds annually, by slowing the growth in healthcare costs and reducing the labour force participation gap with England, in turn boosting devolved tax revenues. Conversely if recent trends persist and health outcomes and labour force participation fall further behind England, the financial challenges facing the Scottish Government would be tougher.  

Today’s report makes clear that improving health and the performance of the healthcare system is vital to Scotland’s finances. However, unfortunately, even substantial improvements in health won’t be enough to avoid difficult decisions on tax and spending.”