Balancing the books in face of external factors

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It is important to understand that Scotland’s budget position is effectively driven by two external factors – the UK’s tax and spend policies, and North Sea activity.

While GERS is of interest in trying to understand Scotland’s future fiscal position, at present it involves little in the way of Scottish Government decisions as an input.

Under independence, this might change, but then again it might not. If Scotland were to remain in a sterling zone, with monetary policy decided in London and with associated fiscal constraints, then the overall budget balance position may be little different.

Within the tax and spend totals there could be scope for shifts in policy – allowing for different taxation and spending priorities – but the overall tax and spend totals could be constrained by UK, sterling-zone wide, fiscal limits.

The alternative would be for greater scope to change tax and spend limits but outside of a sterling zone, although even this freedom could be constrained to some degree by market concerns with regards to government borrowing.

The second big point to note is that the latest figures confirm the importance of North Sea revenues to Scotland’s budget position relative to the UK. Much of the above is what was suggested in the leaked Scottish Government document on Scotland’s financial position following independence. As such, we now know that the Scottish Government is trying to address these genuine concerns and it would be good if this turned into a more public debate.

What is important, as John Swinney’s paper makes clear, is the need to manage finances so that the erratic nature of oil revenues are accommodated. This could be achieved through the use of an oil fund, but such a course of action will be difficult whilst deficits persist.

• John McLaren is an economist with the Centre for Public Policy for Regions (CPPR).

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