Can an Ageing Scotland Afford Independence?

| Publication date: 10 Dec 2013 | Theme: Trade, Investment & Productivity, Exiting the EU | NIESR Author(s): Lisenkova, K | External Author(s): Marcel Mérette | NIESR Discussion Paper Number: 418

The aim and scope of this paper is to isolate the effects of population ageing in the context of potential Scottish independence. A dynamic multiregional Overlapping Generations Computable General Equilibrium (OLG-CGE) model is used to evaluate the two scenarios. The status quo scenario assumes that Scotland stays part of the UK and all government expenditures associated with ageing population are funded on a UK-wide basis. In the independence scenario, Scotland and the rest of the UK pay for the growing demands of the ageing population independently. The comparison suggests that Scotland is worse off in the case of independence. Effective labour income tax rate in the independence scenario has to increase further compared with the status quo scenario. The additional increase reaches its maximum in 2035 at 1.4 percentage points. The additional rise in the tax rate is non-negligible, but is much smaller than the population ageing effect (status quo scenario) which generates an increase of about 8.5 percentage points by 2060. The difference for government finances between the status quo and independence scenarios is thus relatively small.

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