3.8 Medium-Term Fiscal Plan

How would the fiscal gap be closed?

A published, multi-year fiscal plan would set out the path from the opening deficit to a sustainable position. The plan would rely on a combination of economic growth, public-sector efficiency and prioritisation, and, where necessary, tax and spending adjustments. It would be independently assessed, updated annually, and tied directly to the legislated fiscal rules. It would not assume painless closure through growth alone. The plan would be realistic about the scale of the challenge and the time required.

The legislated fiscal rules set the binding targets. The independent fiscal institution polices them. The medium-term fiscal plan is the government’s operational map for meeting those targets. It translates the rules into a concrete, year-by-year path for revenue, spending, the deficit and debt. Without such a plan, the rules remain abstract, and the public and markets have no clear view of how the fiscal gap is to be closed. With a credible plan, the adjustment becomes manageable, sequenced and open to scrutiny.

The main design choice is honesty about the mix of tools: growth, efficiency and explicit measures, scored cautiously. The main constraints are the size of the inherited gap, the initial borrowing premium, limited monetary flexibility under sterlingisation, and the political difficulty of prioritisation. This section confronts those constraints in operational form — not as a promise that the gap vanishes, but as a method for closing it.

The medium-term fiscal plan is the operational centre of the entire public-finance framework. The legislated rules set binding targets for the structural deficit, the debt trajectory, and borrowing limits. The independent fiscal institution assesses compliance and the realism of assumptions. The plan is the government’s published map of how those targets are to be met, year by year, through a combination of economic growth, public-sector efficiency and prioritisation, and explicit tax or spending measures where the first two elements are insufficient. Without that map, the rules lack operational content and markets and citizens have no clear view of the intended path. With a credible, independently assessed and annually updated plan, the adjustment from the large opening deficit becomes sequenced, measurable and open to scrutiny.

This section sets out the plan's purpose, the realistic mix of tools on which it would rest, the rejection of painless scenarios that close large gaps on paper with upper-end growth or undefined savings, the process of independent assessment and annual updating, and the direct linkage to the legislated rules. It does so without claiming that independence automatically improves the public finances, without assuming that growth alone will close a double-digit deficit ratio, and without softening the political and operational difficulty of prioritisation. The opening fiscal position is a fact that institutions designed for scrutiny must confront. The plan is the concrete expression of that confrontation.

The design choice is deliberate honesty about the scale of the challenge and the time required. The plan must strike a balance: a multi-year horizon ambitious enough to demonstrate seriousness and realistic enough to protect core services. Front-loading some measures can build early credibility; excessive front-loading can damage growth and public support. That balance would be struck openly, scored cautiously, and reviewed as evidence accumulates.

Current Position and Legal/Institutional Baseline

Under the present devolution settlement, the Scottish Government publishes an annual budget and a medium-term financial strategy within the constraints of the fiscal framework agreed with the UK Government. Those documents operate inside a sub-sovereign regime shaped by the block grant, the fiscal framework’s adjustment mechanisms, and the reserved status of the major tax bases and of macroeconomic policy. They are not a sovereign medium-term fiscal plan tied to legislated deficit and debt rules as required for a stand-alone state.

Independence would change the baseline. The Scottish Parliament would possess full taxing and spending authority, subject only to the domestic fiscal rules it legislates and to the independent scrutiny it establishes. The medium-term fiscal plan would become the regime's central operational document. Fiscal-rules legislation would require consistency with the deficit path, the debt objective, and the borrowing limits. The independent fiscal institution would assess it before the budget process concludes. It would be updated annually with a public report of progress, deviations and corrective actions. The legal foundation would be the same primary legislation that embeds the rules and reconstitutes the fiscal institution; the plan is the instrument through which those legal requirements take concrete, multi-year form.

International practice confirms the value of a published medium-term framework. Countries that maintain credible multi-year plans, subject to independent assessment and regular updating, tend to experience lower risk premia and more stable adjustment paths than those that rely on annual budgets alone or on unpublished internal strategies. The Scottish plan would align with that practice while addressing the specific starting point of a large inherited deficit under a constrained monetary regime.

Mechanism and Delivery

The plan's mechanism is a statutory requirement, set out in the fiscal-rules legislation, that the government publish a multi-year fiscal plan consistent with the rules, submit it to the independent fiscal institution for assessment, and update it annually. The first plan would be prepared during the transition period so that it is available for the opening budget of the independent state. Subsequent updates would form a regular part of the annual budget cycle.

The plan would set out the intended path for the structural deficit, the trajectory of public debt as a share of GDP, the contribution expected from economic growth, the contribution expected from public-sector efficiency and prioritisation, and the explicit tax and spending measures required to close any remaining gap. Each element would be scored on cautious assumptions. Growth forecasts would be anchored to the independent fiscal institution’s projections rather than to ministerial aspiration. Efficiency and prioritisation yields would be estimated conservatively, recognising that such gains take time and persistent management. Explicit tax and spending measures would include clear yield estimates, implementation dates, and distributional descriptions so Parliament and the public can see what is being proposed.

The independent fiscal institution would assess whether the plan is consistent with the legislated rules, whether its macroeconomic and fiscal assumptions are reasonable, and whether the proposed measures are likely to deliver the stated results. That assessment would be published and would form a non-negotiable input into the budget process, in that it must be available to Parliament and must receive a formal government response. If the institution judged that the plan had become inconsistent with the rules, the government would be required to set out corrective measures. The high threshold for amending the rules themselves would prevent the path from being rewritten for convenience without political cost.

Annual updating would keep the framework current. Each update would report progress against the previous path, explain deviations, and set out the actions required to remain on track. Transparency of the original plan, the independent assessments and the annual updates would allow markets, Parliament and citizens to see whether the government is delivering or drifting. Constant silent revision would erode trust; open, regularly tested plans build it.

Continuity Design

The medium-term fiscal plan is designed to protect continuity of essential payments and services within the adjustment path, rather than treating them as residual items to cut when pressure mounts. State pensions, disability benefits and other social-security entitlements continue under the continuity arrangements set out earlier in the framework. The prioritisation process identifies core services in health, education and public safety for protection. Deposit-protection backstops and other financial-stability commitments that form part of the sterlingisation regime remain funded. Continuity of these items is a design requirement that shapes the prioritisation exercise; it is not an after-the-fact exception to the arithmetic.

Institutional continuity supports delivery of the plan. The independent fiscal institution, the Scottish revenue authority, the statistical office and the core civil service capacity required to cost and implement measures would be established as part of the day-one institutional package. Transitional cooperation with UK bodies, where still required for particular data series or operational support, would be time-limited and would not leave the plan dependent on indefinite external goodwill. The Scottish Parliament provides the democratic forum in which the plan and the independent assessments are scrutinised.

The design therefore integrates continuity of rights and services into the adjustment path rather than placing them in tension with it. A plan that protected continuity only by abandoning the deficit and debt targets would fail the rules; a plan that met the targets only by breaking continuity of essential payments would fail the wider framework. Both failures are avoided by explicit prioritisation inside a multi-year horizon.

Constraints and Trade-offs

Legal constraints

The plan is a statutory instrument required by the fiscal-rules legislation. Its content must be consistent with the deficit path, debt objective and borrowing limits set out in that legislation. The independent fiscal institution’s assessment role is likewise statutory. A future parliament could in principle amend the underlying rules under the high threshold the legislation itself would set. Yet, the design raises the procedural and political cost of doing so. The plan cannot lawfully ignore the rules; if it becomes inconsistent, it requires corrective measures. That legal linkage prevents the plan from drifting into an aspirational document detached from the binding targets.

Fiscal constraints

The scale of the opening deficit, the debt-service cost arising from the negotiated share of inherited liabilities, and the initial sovereign borrowing premium together define a demanding starting point. Growth can make a material contribution, yet it cannot be assumed at rates that close a double-digit deficit ratio within a few years without policy effort. Efficiency and prioritisation can release resources, yet the yields are uncertain and take time to realise. Explicit tax and spending measures therefore form part of the necessary mix. The trade-off is between a faster adjustment that strengthens market confidence and reduces the cumulative interest burden, and a more gradual adjustment that eases near-term pressure on services and households at the cost of a longer period of elevated debt and residual credibility risk. Under sterlingisation, the absence of independent monetary policy removes one potential offset, making the fiscal constraint bind more tightly and reinforcing the need for a cautious, rules-bound plan.

Operational constraints

Costing efficiency measures, prioritisation options and tax changes require analytical capacity inside government and independent verification by the fiscal institution. Implementing those measures requires administrative capacity in the revenue authority, the spending departments and the statistical office. The early years of independence will still be spent building institutions and completing transitional arrangements; the plan must therefore be realistic about delivery capacity in the first budgets. Overloading the early years with complex reforms that exceed administrative bandwidth raises the risk of slippage. Sequencing that respects operational limits is part of credibility.

Political constraints

Prioritisation means that some programmes will be reformed or scaled back. Explicit tax measures mean that some taxpayers will pay more. Both create political costs. A plan that avoids those costs by relying on optimistic growth or undefined savings will be disbelieved by markets and will raise borrowing costs, harming services indirectly. A plan that confronts them openly and subjects them to independent assessment is more likely to sustain support across the multi-year horizon. Sustaining political ownership of the path, including the willingness to update it when off track, is therefore essential. The high threshold for changing the underlying rules raises the cost of opportunistic abandonment, yet it cannot eliminate the underlying political difficulty of adjustment.

Time constraints

Given the scale of the opening deficit, adjustment will take several years. The plan must set a horizon consistent with the fiscal rules—long enough to be deliverable without destabilising core services or the economy, and short enough to show the government is serious. Front-loading visible measures can build early credibility with markets; excessive front-loading can damage growth and public support. The plan itself strikes the balance and is reviewed as evidence accumulates. The first plan must be ready for the opening budget; subsequent annual updates keep the framework current. No later period can treat a medium-term path as optional.

Consistency with the Wider Framework

The medium-term fiscal plan is the operational centre of the public-finances part of this framework. It is the concrete response to the opening deficit set out in section 3.1. It incorporates the debt-service burden that follows from the allocation negotiated under section 3.2. It responds to the initial borrowing premium examined in section 3.3 by providing the transparent path markets require for the premium to remain bounded and to compress over time. Section 3.4 binds it to the legislated fiscal rules, and section 3.5 assesses it through the independent fiscal institution. Tax policy under full powers (section 3.7) and withdrawals from the Scottish Wealth Fund (section 3.6) enter the plan as line items under the rules, not as escapes from them.

The plan aligns with the sterlingisation regime: without independent monetary policy or automatic unlimited last-resort lending, the fiscal path is the principal macroeconomic anchor. Continuity of pensions, essential benefits and deposit-protection backstops is protected by funding those commitments inside a sustainable trajectory rather than on an indefinite deficit. Institutional readiness of the revenue authority, the statistical office and the central bank is assumed as part of the delivery capacity the plan requires. The long-term nuclear basing agreement and the Common Travel Area-style arrangement protect elements of the economic base that support the plan's revenue side. The non-EU stance removes one potential source of short-term fiscal and regulatory disruption. In every case, the plan turns the preceding institutional design into a year-by-year adjustment programme.

Hardest Critiques and Direct Responses

Feasibility

Publishing a multi-year fiscal plan, subjecting it to independent assessment, and updating it annually is standard practice in advanced economies that maintain credible fiscal frameworks. Feasibility is high if the political decision to confront the opening deficit with a realistic mix of tools is taken, if the independent fiscal institution is established with the capacity to assess the plan, and if the analytical and administrative capacity to cost and implement measures is prioritised. Feasibility falls if the plan relies on optimistic growth or undefined savings, or if prioritisation is deferred indefinitely. The framework accepts that conditionality and designs the plan around cautious assumptions and explicit measures rather than around hope.

Cost and fiscal burden

Adjustment imposes costs. Efficiency and prioritisation mean that some lower-value programmes are reformed or scaled back. Explicit tax measures mean that some taxpayers contribute more. Those costs fall on current budgets, households, and businesses. The alternative — an unaddressed structural deficit and a higher risk premium — imposes costs through higher interest payments and the eventual need for a sharper correction. The plan makes the near-term costs visible and sequences them so that core services are protected. The burden is real; the design choice is to confront it deliberately rather than to defer it until markets force a more abrupt adjustment.

Dependence on agreement

The obligation to publish, assess and update a medium-term plan is domestic. The opening debt share and some transitional revenue or expenditure items depend on the assets-and-liabilities settlement and transitional cooperation; those outcomes change the plan's starting point but do not remove the requirement to have one. Contingency planning can maintain a conservative path across a range of negotiating outcomes. The plan itself remains a Scottish instrument.

Transition risk

Early slippage against the path is a material risk while institutions are new, data systems are still stabilising, and political attention is divided across the full transition agenda. Mitigation is conservative scoring of growth and efficiency yields, independent assessment from the first budget, early visible measures that build credibility, and close alignment with the monetary stability package so that fiscal and financial stress do not compound. Another risk is that the plan becomes an outdated document that is quietly ignored; the annual update requirement and the independent institution’s public judgments make drift visible.

Alternatives (status quo and previous proposals)

Proceeding without a published multi-year plan leaves the fiscal rules without operational content and leaves markets without a clear view of the intended path; that alternative is rejected. A plan based primarily on optimistic growth assumptions fails when growth disappoints, and markets anticipate failure; it is rejected in favour of cautious forecasts anchored to independent projections. Relying on one-year budgets alone is incompatible with multi-year deficit and debt rules and is rejected. A back-loaded adjustment that postpones all hard measures lacks credibility and invites a steeper later correction; it is rejected in favour of a sequenced path with early visible actions. The design chooses a published, independently assessed, annually updated plan that combines growth, efficiency and prioritisation, and explicit measures under conservative assumptions.

Political and public credibility

The claim most likely to be called unrealistic is that any government would publish a plan that admits difficult tax or spending choices, or that it can close the gap without harming core services. The precise answer is that an unpublished or painless plan would be disbelieved by markets and would raise borrowing costs, thereby harming services indirectly; that prioritisation is explicitly defined to protect core services in health, education, essential social security and public safety while reducing lower-value expenditure; and that independent assessment makes over-optimism visible to Parliament and the public. Credibility rests on the realism of the path and on the government’s willingness to update it when off track, not on the absence of hard choices. The first plan and the first independent assessment will be the observable test.

Position Summarised

A published multi-year fiscal plan would set out the path from the opening deficit to a sustainable position consistent with the legislated fiscal rules. It would rely on a combination of economic growth scored against independent forecasts, public-sector efficiency and prioritisation that protects core services while reducing lower-value expenditure, and explicit tax and spending measures where the first two elements are insufficient. It would not assume painless closure through growth alone.

The plan would be submitted to the independent fiscal institution for assessment, updated annually with a public report of progress and corrective actions, and tied directly to the deficit path, debt objective and borrowing limits. Credibility rests on realism about the scale of the inherited challenge and the time required. The gap is closed by deliberate, sequenced policy under independent scrutiny, not by optimism or by undefined future reform. A large opening deficit is a fact that must be confronted with rules, institutions and a transparent plan.

Conclusion

How the fiscal gap would be closed is the practical test of whether the rest of the fiscal framework is serious. This position answers with a published multi-year plan that combines cautious growth assumptions, efficiency and prioritisation within a continuity-protecting design, and explicit measures where required; that is independently assessed and annually updated; and that is bound directly to the legislated deficit and debt rules. No one claims that independence automatically improves public finances. There is a claim that an independent Scotland can manage a hard inheritance through institutions designed for scrutiny: rules that bind from day one, a fiscal institution that publishes independent judgments, a Wealth Fund that saves resource revenues rather than plugging near-term gaps, full tax powers exercised inside the framework, and a medium-term plan that shows the path in numbers rather than in hope. That completes the Public Finances, Debt, Taxation and Wealth Fund part of this framework. Credibility is the product of that design, delivered year after year against a starting position stated without softening.

This analysis forms part of People’s Future Scotland: The Independence Debate, a non-party framework examining the practical design of independence. Each section is written to withstand professional scrutiny and to prioritise mechanism, constraint and continuity over aspiration.