Scotland not alone but fiscal sustainability questions cannot be ignored

Article by our Chair Professor Graeme Roy, first published in The Herald on 10 April 2023

Professor Graeme Roy

As trailed in one of my earlier articles, the Scottish Fiscal Commission (SFC) has just published Scotland’s first Fiscal Sustainability Report.

It highlights how, with rising costs of healthcare coupled with an increase in the average age of our population, demands on spending will run ahead of the funds available to government in the decades to come.

In the SFC’s central projection, over the next 50 years future Scottish governments could face an average annual budget gap – the difference between demand for services and revenues – of more than 10 per cent each year.

Scotland is not alone in facing such challenges. The populations of some countries – including Japan and South Korea – are already falling. The World Economic Forum estimates that in the European Union, the old-age dependency ratio – the ratio of elderly people for every 100 working-age people – will rise from 32 today to 57 by 2100.

Just because it is a common challenge does not mean that we can ignore questions of fiscal sustainability here in Scotland.

The average age in Scotland is projected to rise from 42 today to 49 in 50 years’ time. Over the same time period, the percentage of our population aged 65 and over will rise from 20% now to over 30%. Back in 1997, it was just 16%.

The fact that we are, on average, living longer is one of the greatest benefits of the economic prosperity enjoyed throughout the 20th and early-21st centuries. But while we are, on average, living longer the primary reason for our population growing older is the low birth rate.

All this comes with a fiscal cost. Unfortunately, as we get older, the likelihood of us requiring surgery for physical ailments including knee or hip replacements, being diagnosed with illnesses correlated with age such as certain cancers, or suffering from degenerative diseases such as dementia, all increase. In addition, the cost of providing care, with new technologies, drugs and treatments being developed all the time, almost always runs ahead of day-to-day growth in the economy.

Scotland’s population is projected to peak at 5.5 million in 2029/30 but then fall. This, all else remaining equal, will squeeze the tax base of our economy.

There will, of course, be areas where pressures should recede. Fewer young people will mean lower numbers in nurseries, schools, colleges and universities. But any savings will be small in comparison.

If this sounds pessimistic it isn’t meant to be. But this new analysis highlights the scale of the challenge. In essence, the tax and spend model that fits our current population structure will have to change to reflect a change in our demography and cost base. There’s a temptation to put this into the “too difficult” drawer. Or to hope that what may seem simple solutions such as migration, promises of more progressive taxation, or vague references to wellbeing or boosting productivity can come to the rescue. Unfortunately, the scale of the challenge means that there are no easy answers.

Yes, higher productivity may provide additional resources but – as we have seen over the years – this is easier said than done. Migration can undoubtedly help, but with a population of over five million, additional inflows would have to be at multiples far greater than recent trends to materially change these projections. Moreover, higher productivity and increased migration bring spending pressures too whether that be through increased demand or pressures on public sector wages. Devolved taxes have been used to raise revenues in recent years, but to the tune of hundreds of millions of pounds rather than the billions spoken of in the report.

Ultimately, a combination of spending prioritisation, tax reform, economic growth, service re-design and prevention is likely to be necessary. It’s been encouraging how engaged the Parliament’s Finance Committee has been in considering the report’s findings. But conversations need to move beyond Holyrood into substantive policy planning and innovation in government, health boards and local authorities. Ten years ago, the Christie Commission warned of the need to take Scotland’s long-term fiscal challenges seriously. Since then, many of the reforms Christie envisaged have yet to materialise. Hopefully this new report will help act as a catalyst for action