SCOTLAND’S public finances could be facing a “time bomb” unless the Scottish and UK governments recognise the importance of “future proofing” the fiscal framework that will accompany the Scotland Bill.

The warning came in a report from some of the country’s leading economists, who said the crisis could come about if the demographic challenges facing Scotland were ignored. They claim, however, that the imbalances could be addressed by permanently raising taxes in Scotland by the equivalent of 8.5 per cent of Scotland’s Gross Domestic Product (GDP).

The report published today from the National Institute of Economic and Social Research (NIESR) and the Centre on Constitutional Change confirmed concerns that were raised in earlier research from Professor David Bell and David Eiser, of the Centre on Constitutional Change, and David Phillips of the Institute for Fiscal Studies (IFS).

Dr Katerina Lisenkova and Dr Miguel Sanchez-Martinez of NIESR and Professor James Sefton, of Imperial College London, examine the current and future costs of Scottish public spending commitments in their report: the Sustainability of Scottish Public Finances: A Generational Accounting Approach.

This accounting model is aimed at analysing the effect of current fiscal arrangements on both public sector solvency and the redistribution of fiscal burden between generations.

The report scenario report assumes that Scotland has full fiscal autonomy and has to pay for the growing demands of an ageing population through taxes raised in Scotland.

Bell said: “This is an important piece of work by our colleagues at the National Institute. It shows how fairness between generations of Scots will be difficult to achieve without radical changes.

“A principal cause of the generational imbalance is the extent to which the demographic challenge faced in Scotland is greater than in the rest of the UK.

“This work further reinforces the need for a robust fiscal framework free of political interference.”

Lisenkova said that although the health of Scottish public finances had recently attracted a lot of attention, discussion of fiscal matters has often had “a very short-term focus”.

“Our research demonstrates, if future demographic pressures are not taken into account when discussing devolution, it will create a time bomb in Scottish public finances,” she said.

The authors said there were three main reasons for the impending crisis – “declining North Sea revenues, a budget deficit at the beginning of the simulation period and a widening gap over time, primarily due to population ageing”.

However, they added: “The model suggests both the intertemporal fiscal and generational imbalances can be addressed via a permanent increase in taxes equivalent to about 8.5 per cent of Scottish GDP, levied on both living and future generations.”

Sefton added: “The origins of OBR’s annual fiscal sustainability report can be traced to the production of the first set of generational accounts for the UK in 2000.”

The authors concluded that their results indicated the current fiscal situation was unsustainable, “since without a change in the present trajectory of fiscal policy, the government deficit would not be eliminated in the long-run”.

“It is also generationally unbalanced, since the responsibility to close the intertemporal budget gap falls disproportionately on future generations,” they said.

“We find that removing the intertemporal and intergenerational gaps requires a substantial increase in tax revenue, and/or a reduction in general government expenditure.”