The Sustainability of Scottish Public Finances: a Generational Accounting Approach

This paper analyses the long-term sustainability and intergenerational equity of the Scottish public finances by employing a generational accounting model. This represents a novel approach to analysing these issues in the case of Scotland, while having the advantage of capturing policy-relevant intergenerational aspects. We find that, under the baseline scenario, assuming that Scotland has “full fiscal autonomy”, large intertemporal and intergenerational fiscal gaps open up. The three main reasons behind this result are: declining North Sea revenues, a budget deficit at the beginning of the simulation period and a widening gap over time primarily due to population ageing. The model suggests that both the intertemporal fiscal and generational imbalances can be addressed via a permanent increase in taxes equivalent to about 8.5 per cent of Scottish GDP, levied on both living and future generations.