FORMER Labour Chancellor Alistair Darling and SNP Finance Secretary John Swinney have clashed over a new report showing an oil-reliant independent Scotland would face "starker" economic choices than the UK in the years ahead.
In its first detailed analysis of the consequences of independence, the Institute for Fiscal Studies says oil and gas revenue would cover Scotland's relatively high public spending in the short term. But the think tank warned generous social policies may not be sustainable "over the long run" because of volatile and diminishing North Sea income.
The report, to be presented at a seminar in Edinburgh tonight, adds: "If, as is likely, oil and gas revenues fall over the long run then the fiscal challenge facing Scotland will be greater than that facing the UK."
The findings came as Brian Quinn, a former senior Bank of England official, and Owen Kelly, the head of Scottish Financial Enterprise, questioned SNP Government proposals for a sterling zone, in papers for the same David Hume Institute seminar.
Mr Darling, now head of the pro-UK Better Together campaign, said it showed an oil-dependent Scotland would be "exposed". Mr Swinney hit back, insisting the country would approach future challenges from a stronger financial position than the rest of the UK.
The IFS study noted public spending in Scotland was £1200 higher per person in Scotland than the rest of the UK due, in part, to the Government providing free personal care for the elderly and free university tuition.
It said an independent Scotland, with a geographical share of Britain's oil and gas resources, could "slightly more than pay for" existing commitments based on recent North Sea income. It also confirmed SNP claims that Scotland's current debt, relative to the size of its economy, is not as high as the rest of the UK.
However, the report also highlighted that an independent Scotland would be much more reliant on oil and gas – which accounted for 15% of the country's income in 2010/11 – than the UK as whole.
It added: "Like the UK as a whole, and most other developed nations, an independent Scotland would face some tough long-term choices in the face of spending pressures created by demographic change."
David Phillips, one of the authors of the report, said: "Independence would provide Scotland with an opportunity to set its own fiscal course. In common with all countries it would face constraints and would have to make sometimes uncomfortable choices.
"In the short run its higher public spending than the UK average could be covered by oil and gas revenues if these are assigned on a geographic basis.
"In the longer run the loss of these revenues would lead to tougher choices than those faced by the UK as a whole."
Mr Darling said: "The report sets out, in stark terms, just how exposed we would be under independence to one revenue stream.
"North Sea oil is notoriously volatile and, according to the report, the only way that we would even come close to balancing the books in future would be by ensuring that what oil we have left is sold at the highest possible price.
"An economy paid for at the petrol pump is not what Scotland wants or needs.
"The report drives a train through the SNP's claims that Scots would pay less tax, but receive higher public services than we do now under independence. There are difficult economic times ahead. Independence continues to be shown to be an inadequate response."
Mr Swinney said: "This is a very welcome contribution to the debate which confirms that Scotland more than pays its own way and adds to the strength of independent analysis showing that Scotland is in a better financial position than the UK.
"It is clear from this report the UK's economy is struggling, the Chancellor's plans to reduce the debt will fail to hit their target and that post-2014, the UK will continue to face the stark choice of further cuts or tax hikes.
"The IFS report confirms Scotland is more than able to pay our way with public spending offset by revenues raised in Scotland and that with the appropriate share of North Sea revenues Scotland's public finances have been stronger than the UK's in every year from 2006/07 to 2010/11.
"With independence Scotland will be able to face the difficult financial choices ahead from a stronger position than in the UK and use the full range of economic levers to support growth, boost revenues and deliver public services."