Scotland’s deficit remains unsustainable in the long-term despite an improvement last year which could be a blip, two leading economic think tanks have warned.

The Institute for Fiscal Studies and Fraser of Allander Institute sounded a note of caution as the annual Government Expenditure and Revenue Scotland (GERS) report was published.

It showed the notional gap between how much Scotland raises in taxes and benefits from in public spending narrowed from 12.8% to 9% of Scottish GDP, or £19.1billion, last year.

This was due to a surge in North Sea oil and gas revenue during the energy crisis, with Scotland’s 89% geographical share increasing by £6.9bn to £9.4bn in 2022/23. 

SNP Wellbeing Economy Neil Gray welcomed the drop in Scotland’s deficit, while the UK’s stood still at 5.2% of GDP for the second year in a row.

He also said an independent Scotland would have the powers to make “different choices, with different budgetary results, to best serve Scotland’s interests”.

However the two think tanks said Scotland’s notional deficit continued to be a problem, and could force an independent Scotland facing tax hikes and spending cuts.

READ MORE: Scotland's public finances improve thanks to surge in North Sea cash

The IFS said that Scotland’s deficit remained “substantially higher” than the UK’s as a whole, equivalent to an extra £1,530 per person, mostly due to higher public spending in Scotland.

Moreover, it would stay well above the UK deficit unless there was another substantial increase in oil and gas revenues - but these were forecast to fall.

It said that if Scotland’s onshore economy matched that of the UK as a whole, Scotland’s deficit would by 7.5% of GDP in 2027/28, while the UK’s would be around 1.8% of GDP.

The difference would be more than £2,500 per person to Scotland’s disadvantage.  

IFS Associate Director David Phillips said: “In contrast to the situation for the UK as a whole, the surge in oil – and especially gas – prices last year led to an improvement in Scotland’s fiscal position.

“However, Scotland’s notional fiscal deficit remained substantially higher than that of the UK as a whole – 9% of GDP, compared to 5.2%.

“And the gap is set to widen again from next year if oil and gas prices fall back as forecast.  

“As it stands Scotland’s notional fiscal deficit is just that – notional. 

“It is subsumed within wider UK government borrowing on behalf of the whole country. Independence would change that. 

“To avoid even bigger spending cuts or tax rises than in the rest of the UK over the coming decades, an independent Scotland would need to see a sustained boost to economic growth. 

“That’s certainly possible – indeed, during the 2000s, Scotland’s employment, earnings and economic growth outpaced that of the UK as a whole. 

“But the decline in oil and gas output in the North Sea and associated onshore economic activity – noticeable since the referendum in 2014 – would present some tricky headwinds.” 

READ MORE: SNP signals 'faster acceleration' away from oil and gas despite boost

In their response to GERS, the Fraser of Allander said the report was a starting point for a discussion about the “immediate choices, opportunities and challenges that need to be addressed by those advocating new fiscal arrangements”. 

Director Mairi Spowage said: “Here the challenge is stark, with a likely deficit far in excess of the UK as a whole, other comparable countries or that which is deemed to be sustainable in the long-term.

“It is not enough to say ‘everything will be fine’ or ‘look at this country, they can run a sensible fiscal balance so why can’t Scotland?’. Concrete proposals and ideas are needed.”