The Office for Budget Responsibility (OBR) yesterday produced its annual fiscal sustainability report. It contains the OBR’s current best guess at trends in tax revenues and public spending over the next few decades. This exercise is worthwhile because it allows the public to test whether politicians are acting realistically, given the likely direction of taxes and spending in the medium to long term.
One of the main changes from last year’s report is a significant writedown of revenues from North Sea oil and gas, principally a result of much lower forecasts for oil prices than in previous reports. Looking forward to 2040, the oil price is expected to rise very slowly, staying below $100 a barrel until 2035.
The effect on projected oil revenues is staggering. The OBR’s 2013 fiscal sustainability report projected North Sea revenues of more than £69bn between 2015-16 and 2040-41. This year’s forecast is that North Sea revenues will only be worth £2bn over this period. Lower prices are the principal cause of reduced revenues, but lower production following from these lower prices will also hold back the flow of cash to government coffers.
There is huge uncertainty associated with these forecasts. The OBR’s record in forecasting oil revenues, even over the short term, is fairly weak. However, unlike the Treasury, which was usually too pessimistic when it had the responsibility for producing forecasts, the OBR has generally been over-optimistic about the size of North Sea revenues.
The change in the forecasts have significant implications for Scotland. The 2013 fiscal sustainability report implied an annual bonus from the North Sea of around £2.7bn. This latest forecast would imply almost negligible levels of revenues – less than £100 million per annum.
Between 1998-99 and 2013-14, Scotland’s geographical share of North Sea oil revenues averaged £5.8bn per annum. If the latest forecasts are correct, there will continue to be a dramatic drop in the importance of the North Sea as a source of revenue to the UK, and potentially to the Scottish Government.
The latest forecast weakens the case for full fiscal autonomy since, without oil, Scotland’s finances look more parlous than those of the UK as a whole. If full fiscal autonomy is to remain part of the plan, the Scottish Government will have to find ways of raising revenue in other parts of the economy if it also wants to maintain or improve spending on public services.
l Professor David Bell is professor of economics at Stirling University