SCOTLAND’S deficit has ballooned to £40billion, more than eight times the limit set for EU membership, because of the pandemic and declining oil revenue, the UK's leading economic thinktank has found.

The Institute for Fiscal Studies (IFS) is expected to say this week that the gap between Scotland’s spending and tax revenue was up to a quarter of the economy last year.

The IFS estimated Scotland’s deficit had risen from 8.6 per cent of GDP in the financial year before Covid to between 22 and 25% of GDP in 2020-21.

The main difference was a massive injection of UK Treasury funding to help cope with the pandemic that allowed more spending in Scotland without an equivalent increase in Scottish tax revenue.

The UK deficit for 2020-21 is put at around 14.5%.

Nicola Sturgeon has said she wants a second referendum by 2024, Covid permitting.

If there was a Yes vote, her plan is for the first elections to an independent Scottish Parliament to be in 2026, followed by re-entry to the EU without a further vote.

EU criteria require all new members to reduce their deficits to 3% of GDP or less, although this can be fudged in negotiations.

Brussels is also considering relaxing its fiscal rules, which are currently suspended, in light of the financial upheaval caused by Brexit.

Nevertheless, the size of Scotland’s spending gap and the measures which may be needed to close it, could have an impact on the campaign for independence. 

The SNP’s pre-Covid Growth Commission, its economic blueprint for independence, suggested it could take 10 years of spending curbs to halve a deficit of just 6%.

The IFS findings were reported by the Sunday Times.

David Smith of the IFS said: "I think UK deficit is likely to undershoot 17% a little bit, so I'd suggest 22-25% for Scotland, depending on the degree of UK undershooting, and taking account of the fact that Scotland has pushed some of its funding into 2021-22."

Mairi Spowage, interim director at the Fraser of Allander Institute at Strathclyde University, told the paper: “It would not be possible to run structural deficits of this scale over the long run.

"So various options, including policies to grow the economy, expand and change the tax base, increase tax rates or cut spending, are likely to feature.

“Of course, the UK too faces significant budgetary pressures, and this will impact upon Scotland inside or outside the Union. With Covid-19 making everyone’s public sector deficits that much bigger, the challenge of building a model of fiscal sustainability just got harder.”

Economist John McLaren of Scottish Trends added: “One of the big changes since 2014 has been the virtual disappearance of North Sea revenues an independent Scotland might expect to have. 

“This means Scotland’s underlying fiscal deficit is less erratic but also, Covid aside, unsustainably high.

“The SNP’s growth commission report acknowledged this and the EU would clearly have concerns, too. 

“However, the future position on how much Scotland would need to trim its fiscal sails by is uncertain as the EU has suspended its fiscal rules. It intends to review them post-pandemic with a strong likelihood that they will be more accommodating. 

“Nevertheless, some difficult decisions would inevitably lie ahead post-independence.”

On BBC One’s Andrew Marr Show today, Ms Sturgeon said the IFS study made the case for independence, as it dealt with the deficit’s size inside the Union.

She said: “You're quoting a study that is about Scotland's fiscal position within the United Kingdom. It's not a reflection of what Scotland would be like as an independent country.

“I'm sure it hasn't escaped your notice that the deficits and debt of all countries over the past year has increased, as countries quite rightly have bothered to support Covid policies.

“The UK debt has gone over £2trillion. Right now the taxes that are paid in Scotland pay for health and education all of those devolved services as well as reserved services like welfare and pensions. So we raise the monety to pay for all these important things.

“Like every other country, we would have a deficit if we were an independent country tomorrow.

“But there's no credible economists in any other country suggesting that countries should manage those data deficits through austerity and cuts. Why would Scotland be unique?

“This is about choices that we make as a country, and are able to take ourselves, not choices that are imposed upon us, which is Scotland's experience all too often right now.”

Pressed on how Scotland would close the deficit, especially in light of the SNP’s spending pledges in its manifesto for next month’s Holyrood election, she said the Scottish Government had already set out cautious numbers for the next five-year parliament.

She went on: “Longer term, if you're projecting forward to when Scotland is independent,, and you're asking how we deal with a deficit, we'll deal with a deficit in the same way, almost every other country across the world that has a deficit deals with that.

“You manage your finances through borrowing, through prudent decisions about public spending. Again, Scotland would not be unique as a country with a deficit. 

“It would almost be unique if it didn't have a deficit,  and we deal with that in the way that independent countries the world over deal with that.”

Scottish Tory finance spokesman Murdo Fraser said: “Nicola Sturgeon uses grievance and grudge to whip up nationalist fervour yet she cannot answer basic questions about the finances of an independent Scotland and, on this evidence, no wonder.

“These figures lay bare the bleak reality of the chasm between tax revenues and public spending. Future generations would face an impoverished future, while arrogant SNP politicians would be just fine.

“Not only do the SNP have no credible currency plan, but they also have no obvious route to join the EU and on the basis of these numbers, it looks highly implausible.”

Scottish Liberal Democrat Treasury spokesperson Christine Jardine MP said: "This shows yet again both the scale of the economic challenge facing the country and the fallacy of claims of quick re-entry to the EU put forward by the SNP.

“It’s time they came clean on whether they are planning tax rises or spending cuts to meet that target.

"This week has not only exposed the SNP as desperately confused over the economics of independence but revealed that they are contemplating a hard border with England. This would not only be dreadful for trade but throw up barriers between friends and families.

"Liberal Democrats will continue to argue for close relationships with both Europe and the rest of the UK. That's how to ensure Scotland's economy thrives."

Pamela Nash, chief executive of the anti-independence Scotland in Union group, said: “While every country is facing huge financial pressures, as part of the UK we have been able to spend billions to protect jobs and our NHS.

“As a new country with no credit history, a separate Scotland would be hit with unfavourable borrowing rates that would have long-lasting consequences for public spending.

“It’s time for some honesty from the SNP – joining the EU would not be guaranteed and would require massive cuts for schools and hospitals, steep tax rises, and the creation of a hard border with England.”