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Report: iScotland would have to cut spending or increase taxes to reduce debt levels

An independent Scotland would have to cut spending or increase taxes in a bid to reduce its debt levels, a new report has warned.

The Scotland Institute think tank said if there was as Yes vote in September's referendum, the amount of debt the country would inherit from the rest of the UK would "very probably" mean it would have a lower credit rating and would therefore have to pay more interest on its borrowings.

It added: "The implications of this in turn are that any prudent future independent Scottish government would need to try and reduce its debt through either a reduction in spending, an increase in taxation, or a combination of the two."

Dr Azeem Ibrahim, the institute's executive chairman, said: "A future Scottish Government's options on spending are likely to end up being more limited than they are even now and Scottish voters should be wary of SNP promises on certain issues such as greater public spending in the future."

The report, by the institute's legal fellow Jonathan Price, said the amount of debt an independent Scotland would inherit is one of the "key matters that would need to be agreed" if the referendum results in a Yes vote.

It added that "taking on a share of debt would "be the first test of credibility of an independent Scottish state in the eyes of the international community".

An independent Scotland would most likely start off with with a smaller debt to gross national product ratio than the remaining UK, the report said.

But it added the debt level if Scotland left the UK could "still be very high" in comparison to other countries.

If the UK debt was divided on the basis of population, the think tank said Scotland "could expect to agree to reimburse the remaining UK for £153 billion, or 86% of it's GDP".

The report said this was a "significant debt burden", adding: "This would be a high level in comparison to some other small yet wealthy European countries.

"For example, this would be considerably higher than Sweden's 53.5%, Norway's 35.5% and Switzerland's 42.1% debt to GDP ratios.

"Additionally, the latter two countries incur higher rates of interest on their borrowing (4.3% and 2.7% respectively) than the UK (0.5%), suggesting that Scotland could expect to pay more in interest repayments as an independent country than it does as part of the UK."

This level of debt, together with other factors such as growth prospects , external liquidity, fiscal performance and flexibility and monetary flexibility, would "very likely result in an independent Scotland receiving a lower sovereign credit rating" than the UK currently has, the report argued.

As a result, it said if Scotland left the UK it could result in the country "incurring higher borrowing costs".

The think tank claimed: "Any future independent Scottish government would need to further consolidate its fiscal position, meaning either an increase in taxes, a reduction in government spending or a combination of these two measures."

While the report said an independent Scotland would "begin as a wealthy country by most international standards", it added that there were concerns about the increasingly elderly population and declining North Sea oil and gas.

Commentators "almost universally" support the view that an independent Scotland would not receive the highest AAA credit rating, it said.

It also claimed that if an independent Scotland does not enter a monetary union with the remaining UK "it would likely incur an even lower credit rating and higher borrowing costs in the short to medium term".

Chancellor George Osborne and his Labour and Liberal Democrat counterparts have all ruled out doing such a deal with Scotland in the event of a Yes vote.

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