Independent Scotland Would Face Economic Challenges in Long Run - IFS

By Ainsley Thomson

Scotland's public finances would be viable in the short term if it were to gain independence from the U.K. thanks to its oil and gas revenues, but its economic position would become challenging over the longer run as those resources run out, a new study said Monday.

The Institute for Fiscal Studies, an economic think tank that carried out the study, said the question of how to allocate oil and gas revenues if Scotland gains independence in the 2014 referendum would be hugely important to the country's prospects.

The institute said that if revenues from North Sea oil and gas fields were allocated on a geographical basis--which would see Scotland get about 90% of revenues--an independent Scotland would be able to finance its high public spending--GBP1,200 more per person than in the rest of the U.K.

But if the revenues were allocated on a population basis--which would see Scotland get around 8.4% of them--there would be a significant gap between spending and tax receipts.

The IFS also warned that if, as expected, oil and gas revenues fall over the longer run, Scotland would face a greater fiscal challenge than the rest of the U.K.

"Independence would provide Scotland with an opportunity to set its own fiscal course," said David Phillips, one of the report's authors. "In common with all countries, it would face constraints and would have to make sometimes uncomfortable choices."

Last month, U.K. Prime Minister David Cameron and Alex Salmond, first minister of Scotland's semi-autonomous parliament, signed an agreement for a referendum on Scottish independence to be held in two years.

Mr. Salmond, whose Scottish National Party has advocated withdrawal from the U.K. since the 1930s, is campaigning to persuade Scots that their nation, rich in natural resources and entrepreneurial spirit, can join the ranks of other small, rich European countries if only it loosened the shackles binding it to London. Advocates of maintaining the union are playing on the uncertainty about Scotland's economic prospects after independence.

The financial crisis that brought down investment bank Lehman Brothers in 2008 and triggered a global recession was particularly hard for the small countries Mr. Salmond had hoped Scotland could emulate, like Iceland and Ireland.

Scots departing the U.K. can also expect to be presented with a bill from London for bailing out Royal Bank of Scotland Group PLC (RBS.LN) and Bank of Scotland, now part of Lloyds Banking Group PLC (LLOY.LN), at the height of the crisis. Nor is it clear whether an independent Scotland would automatically qualify for membership of the European Union, or what currency it would use.

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(Paul Hannon and Jason Douglas contributed to this report)