AN independent Scotland could establish an oil fund and maintain public services only if it slashed defence spending, a think tank has warned.

The Centre for Public Policy for Regions (CPPR), based at Glasgow University, backed Scottish Government plans for a savings fund in the event of independence.

But in a report it warned tax rises or spending cuts would have to be imposed before revenues from North Sea oil and gas could be set aside.

In order to protect day-to-day public services it suggested big cuts to defence, overseas aid and Foreign Office functions such as embassies.

The report also warned that independence would "most likely lead to a small net loss in government funds" as revenue from oil failed to match cash currently redistributed from the rest of the UK via the Barnett Formula.

The report follows proposals from the Scottish Government's Fiscal Commission earlier this month. The Scottish Government's expert panel concluded that an independent Scotland should establish an oil savings fund as early as 2017, while the country was still in the red.

Summarising their new report, CPPR economists Jo Armstrong and John McLaren wrote: "The setting up of a savings fund remains a worthy ambition and ... setting aside relatively small sums for such a fund would be possible if spending was cut.

"For this to have little impact on current devolved spending areas then savings to the currently reserved spending areas such as defence and foreign affairs might be possible, specifically if they were to be in line with the spend per head experienced in similar, small, independent economies.

"However, even if this were manageable, the annual input into such a fund is likely to be relatively small and nothing like the scale seen in Norway."

The report said an independent Scotland would need to cut spending by £3 billion per year to make an oil fund viable.

The savings could be made, it suggested, by cutting Scotland's current £3.4bn contribution to UK defence to Ireland's level of defence spending, £750 million. Further cuts to spending on overseas aid and foreign embassies could take the savings over £3bn.

The savings would be required to plug a black hole in an independent Scotland's finances - a shortfall disputed by the pro-independence campaign - caused by the loss of cash redistributed from the rest of the UK under the Barnett Formula, the 30-year-old mechanism used to share public spending between the nations of the UK.

Scottish Labour's finance spokesman Iain Gray said: "This confirms the inconvenient truth the SNP dare not admit in public - an independent Scotland would be entirely reliant on the volatility of oil and would mean serious instability in the public finances.

"This report also confirms that an oil fund would have to be paid for by cuts to public spending.

"It is time Alex Salmond ­admitted what the experts are telling him and was honest about the consequences of separation."

Secretary of State for Scotland Alistair Carmichael said: "Here is another group of economic experts from Scotland pointing out the risks that come with independence. These academics confirm that oil revenues will not fill the gap of funding that Scotland would lose by leaving the UK. An independent Scotland would also have to cut spending or raise taxes to pay for an oil fund."

A Scottish Government spokeswoman said: "We welcome the CPPR's conclusion the economic rationale for an oil savings fund is clear and a worthy ambition."