:00:00. > :00:00.you confident the Government will go ahead and implement that in full?
:00:00. > :00:00.I'm confident that the spirit is willing. We have to make sure that
:00:00. > :00:15.the flesh doesn't weaken. Thank you very much
:00:16. > :00:21.Tonight on Newsnight Scotland, higher taxes or swingeing cuts to
:00:22. > :00:25.make the budget balanced in an independent Scotland, but does the
:00:26. > :00:29.ISS reports suggest that we should stick with the union or that the
:00:30. > :00:35.whole UK should shake up its tax system more Roddick clique? Good
:00:36. > :00:40.evening. The Institute for Fiscal Studies has a reputation as being
:00:41. > :00:46.the gold standard amongst number crunchers. Today's report at first
:00:47. > :00:53.reading seems like a fillip for the prounion campaign, but could the
:00:54. > :00:57.report be used to argue that both Scotland and the UK need a shake-up
:00:58. > :01:04.to their tax system? We will hear from a director for the ISS in a
:01:05. > :01:11.moment at first this report. From stone to Shetland, ask anyone what
:01:12. > :01:17.they think one of the most important issues in the referendum is and they
:01:18. > :01:21.would save the economy. Which is why today's report from the Institute
:01:22. > :01:27.for Fiscal Studies is attracting so much attention. It says an
:01:28. > :01:32.independent Scotland would need to cut spending or increase taxes to
:01:33. > :01:36.survive. At the moment, public spending per head of the population
:01:37. > :01:41.is higher in Scotland than the rest of the UK, but money from north Sea
:01:42. > :01:46.oil revenues more than makes up for this. However, these will decline
:01:47. > :01:51.and ultimately leave Scotland with a fiscal gap, the difference between
:01:52. > :01:57.what you get and what you spend. As part of the UK, this gap would be
:01:58. > :02:03.0.8%. If Scotland were to leave, it would be double. One of the authors
:02:04. > :02:12.of the report said an independent Scotland would face tough choices.
:02:13. > :02:16.Scotland's chelation is projected to age more rapidly than the UK as a
:02:17. > :02:19.whole which would put pressure on health and pensions, but also for
:02:20. > :02:26.Scotland at the moment revenues raised from activity in the North
:02:27. > :02:30.Sea make up a significant proportion of revenue. Over the longer term we
:02:31. > :02:34.will see the revenues declining as the reserves from the North Sea
:02:35. > :02:38.deplete, and as a result independent Scotland would have to think
:02:39. > :02:46.carefully about how it could raise similar amounts of money elsewhere
:02:47. > :02:53.or cut levels of spending. The IFS forecast there would have to be cut
:02:54. > :02:59.of 8% in spending or a rise in tax, the equivalent of VAT going up to
:03:00. > :03:05.28%. But it is not all bad news, Scotland could also have the chance
:03:06. > :03:08.to create an optimal tax system, leading to some taxes being lower
:03:09. > :03:21.than the rest of the UK. John Swinney believes it underlines the
:03:22. > :03:25.case for Scotland going it alone. It is outpacing the UK and we have to
:03:26. > :03:30.make sure the other powers we would acquire on business taxation, the
:03:31. > :03:33.ability to integrate tax legislation, the ability to ensure
:03:34. > :03:41.we have a more streamlined system of getting people into employment, all
:03:42. > :03:45.of these are tools which are not available under devolution now. He
:03:46. > :03:51.points to the continent as an example of countries that get it
:03:52. > :04:00.right. If we had the same growth rate of small European countries,
:04:01. > :04:06.our economy would be larger up to ?4.5 billion. Having the ability to
:04:07. > :04:13.create better economic opportunities for the country. In every year in
:04:14. > :04:21.the last 20, we have spent more than we got in bar the last year. If you
:04:22. > :04:26.look at the UK, Scotland has grown faster, second only to London and
:04:27. > :04:32.the south-east, so the idea we are being held back is nonsense. If you
:04:33. > :04:37.look at countries like Norway and Denmark, they say look at them but
:04:38. > :04:41.they have higher taxes. The report is being seen by those against
:04:42. > :04:46.independence as a warning of choppy waters ahead. Those for saying it
:04:47. > :04:53.underlines the need for change. Tomorrow is the Scottish
:04:54. > :04:56.Government's turn to make its case. I'm joined now by the director of
:04:57. > :05:01.the Institute for Fiscal Studies, Paul Johnson. Your message today was
:05:02. > :05:06.increase taxes or cut spending to balance the books. That could easily
:05:07. > :05:10.have been your message to the UK Government who are in the same
:05:11. > :05:18.position. There are similar pressures facing the whole of the
:05:19. > :05:23.UK. The population is ageing, we are starting from a difficult fiscal
:05:24. > :05:27.situation so some consolidation is required. The difference for an
:05:28. > :05:32.independent Scotland would be twofold. First its population is
:05:33. > :05:36.ageing somewhat more quickly. The proportion of older people will grow
:05:37. > :05:41.more quickly than for the UK as a whole, and secondly spending levels
:05:42. > :05:46.in Scotland are significantly higher than spending levels and the rest of
:05:47. > :05:53.the UK, currently made up for by North Sea oil revenues, which are
:05:54. > :05:57.volatile or will fall over time. We know that George Osborne says
:05:58. > :06:02.austerity needs to continue for some time, that the debt levels need to
:06:03. > :06:06.be brought down. If there was an independent Scotland in 2016, do we
:06:07. > :06:11.have any reason to believe that in the early years of independence
:06:12. > :06:16.Scotland would not still be in the same position? It would need to do
:06:17. > :06:21.something about the level of debt it would inherit. There is uncertainty
:06:22. > :06:27.about how the negotiations would end up about the level of debt, but the
:06:28. > :06:31.UK at that stage would have debt at something like 80% of national
:06:32. > :06:36.income. That would be a very high level of debt for a new nation to
:06:37. > :06:42.take on so the fiscal situation for Scotland, at least as much as the UK
:06:43. > :06:47.as a whole, would be difficult in the first few years. If independence
:06:48. > :06:51.arrives, it will be in the middle of the current consolidation the UK
:06:52. > :07:04.Government is going through. Where an independent Scotland to continue
:07:05. > :07:10.that through, that... The point you make about the unknown is as regard
:07:11. > :07:15.to the debts, to some observers is the problem with this report. You
:07:16. > :07:18.are looking at a 50 year timespan here. We know from chancellors in
:07:19. > :07:24.recent years that predicting what will happen with an economy a few
:07:25. > :07:30.years into the future is not an exact science so how can you give
:07:31. > :07:33.these figures? What we are not doing is predicting, we are trying to
:07:34. > :07:40.illustrate the scale of the choices that we will need to make in order
:07:41. > :07:45.to stop running into problems. The report follows precisely the
:07:46. > :07:51.methodology of the Office for Budget Responsibility and what they do over
:07:52. > :07:57.a 50 year period... Their projections have not been altogether
:07:58. > :08:01.accurate. This is looking over 50 years and saying what you would need
:08:02. > :08:04.to do to avoid running into trouble because we know for sure there will
:08:05. > :08:08.be an ageing population, and we know for sure spending on health and
:08:09. > :08:13.pensions is higher in a population like that, and this is saying that
:08:14. > :08:18.in order to avoid problems down the road you need to make changes in the
:08:19. > :08:27.short run. These are plausible changes, smaller than has happened
:08:28. > :08:31.over this current period, but it is setting out a series of challenges
:08:32. > :08:37.which would face an independent Scotland. With regards to dealing
:08:38. > :08:43.with those challenges, they could be offset by higher immigration figures
:08:44. > :08:46.for instance, and for instance oil revenues could be higher than
:08:47. > :08:51.predicted at the moment so that could balance out some of the
:08:52. > :08:56.issues. There are all sorts of things that may happen differently.
:08:57. > :08:59.We have tried to look at a range of scenarios, even on our most
:09:00. > :09:07.optimistic scenarios which have levels of oil revenues at the level
:09:08. > :09:13.the Scottish Government is suggesting they might be, even on
:09:14. > :09:19.that scenario the Scottish situation looks a little bit worse than that
:09:20. > :09:23.for the rest of the UK, but this is not unusual among developed
:09:24. > :09:27.countries. Developed countries as a whole are facing these challenges,
:09:28. > :09:32.what this is setting out is the kind of response you would need to put in
:09:33. > :09:36.place. Things may turn out great, and that would be fantastic, but you
:09:37. > :09:41.cannot plan on the assumption that things will turn out like that. You
:09:42. > :09:48.need to have some idea of how you will respond on a more cautious
:09:49. > :09:51.assumption. We are going to get a response from the Scottish
:09:52. > :09:57.Government because on Tuesday they will be talking about some of the
:09:58. > :10:02.economic levers they would use. We are told we will get details on
:10:03. > :10:08.corporation tax, attracting new business and new jobs, could those
:10:09. > :10:14.measures mitigate against the issues you have described? The UK tax
:10:15. > :10:18.system is a bit of a mess, not near what an optimal tax system would
:10:19. > :10:23.look like. There are opportunities for a newly independent country to
:10:24. > :10:26.sort out some of those problems which would allow you to raise as
:10:27. > :10:32.much money more efficiently, or raise more money, so there are
:10:33. > :10:36.certainly opportunities which are probably available to a newly
:10:37. > :10:40.independent country for radical change in a way which is more
:10:41. > :10:45.difficult for the UK as a whole, where the tax system has evolved
:10:46. > :10:50.over such a long time. Opportunities certainly exist but they are not
:10:51. > :10:54.easy. If you are going to cut corporation tax, you probably need
:10:55. > :10:58.to raise other taxes in the short-term. Some of the changes you
:10:59. > :11:07.need to make to the tax system would involve radical change to levels VAT
:11:08. > :11:11.for example, to the way petrol is taxed, and these are not easy
:11:12. > :11:17.changes but they are easier for a new country than one which is mired
:11:18. > :11:32.in its history. Do you form a view on plans for the oil fund? Or is
:11:33. > :11:38.there a difficulty in saving and spending at the same time? There is
:11:39. > :11:42.a difficulty in using the oil fund if you need that money to make up
:11:43. > :11:47.the difference between current spending and current revenues. It is
:11:48. > :11:51.correct to say that you do need to treat revenue from oil taxation
:11:52. > :11:58.differently from other revenues because it is so volatile. It jumps
:11:59. > :12:07.around by 100% over a couple of years. You can see it halved between
:12:08. > :12:11.2009 and 2010 for example and changes rapidly. You need to
:12:12. > :12:16.essentially tried to balance the budget before you have even taken
:12:17. > :12:19.account of the oil revenues. The chances of using the revenues as a
:12:20. > :12:24.separate fund while balancing the rest of the budget, or if you were
:12:25. > :12:29.to try to do that, then the scale of fiscal change you would need to make
:12:30. > :12:33.to achieve that in terms of higher taxes elsewhere would be even more
:12:34. > :12:43.significant than those we set out in our report. I am joined by Stuart
:12:44. > :13:00.Hussey from Westminster, and by Ian Gray from Edinburgh. 6% spending
:13:01. > :13:06.cups -- cuts or 9% rises, which? They say you have either to raise
:13:07. > :13:10.taxes or cut spending. They never focus on policies for growth. It is
:13:11. > :13:14.the policies for growth that will be empowered by the Scottish Government
:13:15. > :13:21.having access to the fiscal levers we currently do not have. Which
:13:22. > :13:26.particular levers do you want and how much growth would be produced?
:13:27. > :13:31.Would independence, we would have all of the fiscal levers. -- with
:13:32. > :13:42.independence. I know there were previous figures published on a
:13:43. > :13:46.modest cut to corporation tax. That means an additional 20,000 jobs over
:13:47. > :13:54.the medium term. One small measure like that announced in advance,
:13:55. > :13:58.phased-in, would give you 1.5% in GDP over that period. That is
:13:59. > :14:02.precisely the kind of thing an independent Scotland will be able to
:14:03. > :14:08.do. Can you give us any guarantees on tax and spending in the UK after
:14:09. > :14:13.2015? People have been asking for an impartial look at what would happen
:14:14. > :14:18.after independence. Would Scotland be better off or worse off? Now we
:14:19. > :14:23.have got a report from an impartial think tank which looks at a range of
:14:24. > :14:30.scenarios, even bills in the SNP's own predictions. -- bills in. It is
:14:31. > :14:38.unequivocal about what Scotland would face over and above the UK tax
:14:39. > :14:40.increases and spending cuts. He figures that you used in your
:14:41. > :14:48.introduction were the most optimistic scenario. The worst
:14:49. > :14:52.scenario involved more than a quarter, 27% cuts, in public
:14:53. > :15:01.spending. This is the information that many people have said they
:15:02. > :15:06.want. It is an impartial judgement. They are projecting 50 years into
:15:07. > :15:12.the future. In 1963, was anybody predicting where we would be this
:15:13. > :15:15.year? Yes, but the SMP themselves are happy to predict 50 years into
:15:16. > :15:20.the future in terms of other revenues. The fact that the matter
:15:21. > :15:26.is, if you actually read the report, these choices about tax increases
:15:27. > :15:30.are cuts in public expenditure, are not 50 years in the future. They are
:15:31. > :15:37.at the end of this decade. The impact would be devastating. And it
:15:38. > :15:39.would be very quick after Scotland separated from the rest of the
:15:40. > :15:46.United Kingdom. As for a long-term forecast, Stuart has just quoted the
:15:47. > :15:52.forecast on the impact of corporation tax, which is based over
:15:53. > :15:57.a 30 year period. The truth is, that cut in corporation tax, a windfall
:15:58. > :16:00.for the banks and the energy companies who have been raising
:16:01. > :16:06.their prices that everyone pays, that would have to be paid for. Paul
:16:07. > :16:11.Johnson made that point. It would have to be paid for by more
:16:12. > :16:15.increases in tax and cuts in public expenditure. The SMP are actually
:16:16. > :16:21.suggesting they would make things worse. John Swinney said he would
:16:22. > :16:30.balance the books in an independent Scotland. Your party has been
:16:31. > :16:33.calling for more borrowing. Or the power to borrow. Surely that will
:16:34. > :16:40.just add to the debt you inherit from the UK? We need that power as
:16:41. > :16:48.every independent country on the face of the planet has that. You
:16:49. > :16:56.inherit some debt from the UK and you will borrow as well? The UK will
:16:57. > :17:01.be borrowing for the next 50 years. You are telling us that things will
:17:02. > :17:09.be better in Scotland? The last five years, our deficit has been lower
:17:10. > :17:16.than the UK's. The rate at which our debt has risen would be better than
:17:17. > :17:20.the UK's. We are digressing. This is predicated on a pole looking 50
:17:21. > :17:24.years into the future, leaning heavily on demographic changes. Is
:17:25. > :17:28.anybody really suggesting that in 1963 we could have forecast the
:17:29. > :17:32.collapse of the Berlin Wall, the European Union as we know it, and
:17:33. > :17:40.massive migration from former countries of the Soviet bloc? The
:17:41. > :17:45.ISS are also talking about 2015 and 2017, to be fair. Tomorrow we will
:17:46. > :17:50.get details from John Swinney about plans to help small businesses,
:17:51. > :17:54.medium-sized businesses, to cut corporation tax, attract new
:17:55. > :18:01.business, create new jobs. What is wrong with that? We will have to pay
:18:02. > :18:05.for that in public spending cuts and higher taxation in the same way we
:18:06. > :18:12.have two pay for John Swinney's other plan to set up an oil fund.
:18:13. > :18:21.But if jobs are created, taxation will rise, so that could offset
:18:22. > :18:24.those tax cuts? Well, this is an economic theory that no serious
:18:25. > :18:30.country in the world believes any more. It goes back to the days of
:18:31. > :18:35.Ron Reagan. Let's go back to the beginning. What we have is an
:18:36. > :18:38.impartial report on what economic choices and independent Scotland
:18:39. > :18:44.would face. It says that no matter how much optimism they have built
:18:45. > :18:48.into their model, it always meant that we would face either tax
:18:49. > :18:54.increases or public spending, or a combination of both. First Stuart to
:18:55. > :18:58.suggest that will not happen because something that we cannot yet
:18:59. > :19:03.imagine, like the fall of the Berlin Wall, will happen sometime in the
:19:04. > :19:07.future, is just absurd. We have to make this judgement on whether this
:19:08. > :19:11.proposition will be better or worse for Scotland on the basis of what we
:19:12. > :19:15.know. One of the things we know, as Paul Johnson said, is that the
:19:16. > :19:24.population is ageing. We have to pay for that. 20% of Scotland's economy
:19:25. > :19:30.would be based on oil. We know that oil revenues decline. They will
:19:31. > :19:37.decline. We will face this choice. Tax cuts or cuts in public
:19:38. > :19:42.spending? It is incumbent on John Swinney to tell us what tax
:19:43. > :19:51.increases are planned, or what cuts on public spending are planned. The
:19:52. > :19:56.powers of independence are to grow the economy and create jobs and
:19:57. > :20:04.prosperity, not to stick to the Tory spending plans, which this forecast
:20:05. > :20:10.is predicated on. Will plan include any tax rises? He spoke about oil
:20:11. > :20:13.being volatile. I remember one year Alistair Darling suggested revenue
:20:14. > :20:19.would be 6 billion. They were doubled at 12 billion. I'm always
:20:20. > :20:25.struck by how fast Unionists want to cling onto bad forecasts for
:20:26. > :20:29.Scotland. Use the powers of independence to grow the economy, to
:20:30. > :20:34.get the GDP growth we have lacked as part of the UK, to deliver jobs and
:20:35. > :20:40.prosperity for everybody rather than clinging onto 50 year forecast which
:20:41. > :20:43.talks Scotland down and revel in that in the way that Iain Gray is
:20:44. > :20:48.doing. Thank you very much indeed for joining us.
:20:49. > :20:56.A quick look at a couple of newspapers. The Daily Mail focusing
:20:57. > :21:02.on the report exposing the SMP economic gap. The front page of The
:21:03. > :21:09.Daily Telegraph focuses on the ?6 billion blow from that study. The
:21:10. > :21:14.front page of the Scotsman has a story about Denis MacShane being
:21:15. > :21:18.found guilty of fiddling expenses. That is all from me. Gordon is back
:21:19. > :21:24.tomorrow night. I will be back in the morning. Good night.
:21:25. > :21:32.Good evening. A lot more sunshine around tomorrow. But the cold air is
:21:33. > :21:38.with us. Some ice around. There could be snow for a north and west
:21:39. > :21:43.in Scotland, the hills of Wales. A few rain, hail and sleet showers
:21:44. > :21:50.towards parts of Yorkshire, Lincolnshire and North Yorkshire --
:21:51. > :21:55.Norfolk. A lot sunnier for the bulk of England. A few wintry showers in
:21:56. > :22:00.the Midlands in the afternoon. Most of us will have sunny skies. Still a
:22:01. > :22:05.few showers across West Devon, Cornwall and Cardigan Bay in Wales.
:22:06. > :22:10.That could give a slight covering of snow over the high ground. For most,
:22:11. > :22:16.rain, sleet or hill. More cloud in the north-west in the afternoon.
:22:17. > :22:19.Through Scotland as well. A chilly day in prospect. Sunshine in the
:22:20. > :22:20.afternoon.