Analysis: New bulletin leaves questions to answer as projections tend to look on the bright side

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THE Scottish Government’s Oil and Gas Analytical Bulletin is a very welcome addition to the statistical landscape, especially with the referendum approaching.

It provides projections of North Sea-related revenues for an independent Scotland. By 2017-18, these range from around £4 billion to almost
£12bn. This £8bn range is greater than the entire Scottish local government budget and gives some idea of the scope for budget variability.

As the analysis stands, there are some question marks over the assumptions used in these projections. Both the oil price and production scenarios highlighted tend to look at the upside of alternative projections, rather than the full range. So on prices, for example, it includes a variety of higher longer-term estimates, but excludes those by Norges Bank, the IMF and the OECD that are lower.

Their most optimistic scenario assumes: a relatively high oil price, a relatively high production profile and the extent of taxable revenues remaining relatively high. As a result, it is very much a top-of-the-range one and much less likely to transpire than the other scenarios outlined. Neither is it mirrored by an equally pessimistic scenario.

The document does not indicate which scenario it suggests would be most appropriate to use for government spending planning purposes. However, if the Scottish Government were to take the advice of its own Fiscal Commission, then “an attractive approach in the short term would be to plan the government’s spending plans on the basis of a cautious forecast of oil revenues produced by an independent fiscal commission”.

It could be argued that that is precisely what the UK Office for Budget Responsibility (OBR) currently provides.

Under most scenarios, North Sea revenues are expected to be flat or falling in real terms, in comparison with their expected 2012-13 level of around £7bn. Only by using the most optimistic scenario is there a bounce-back, and even then there seems no prospect of returning to the 1980s heyday.

The North Sea would clearly continue to be a very valuable resource for any economically independent Scotland. However, its management remains a key issue in terms of ensuring fiscal stability.

As the Fiscal Commission also recommends, in the long term Scotland should aim for an onshore budget balance and allow all oil and gas receipts to be saved in an oil fund. We remain some way from understanding how this might be achieved.

• John McLaren and Jo Armstrong are professors At the Centre For Public Policy For Regions, University Of Glasgow.