Jim Gallagher: Making figures add up no simple matter

Oil worker on the Nelson North Sea Oil Field. Picture: Hamish Campbell
Oil worker on the Nelson North Sea Oil Field. Picture: Hamish Campbell
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The volatility of oil prices has major implications for spending in an independent Scotland, writes Jim Gallagher

How the GERS has changed. Way back in 1991, when then Scottish secretary of state Ian Lang invented, not the football team, but the statistical series analysing government expenditure and revenue in Scotland – hence the GERS acronym – the numbers were used to demonstrate what a good deal Scotland got from being part of the UK. Today, SNP ministers are using the latest statistics to demonstrate how well-off an independent Scotland would be.

So, has Scotland changed from some sort of fiscal basket case to a land of milk and honey, where generous public spending can be afforded at reasonable tax rates?

Not quite. Scotland’s relative economic position in the UK has got rather better: we’re now very close to the UK average on all sorts of measures of prosperity – and that brings in taxes. But this argument is about oil.

The numbers have been telling the same story for years. Today’s will not be radically different. Scotland has high public spending compared with the rest of the UK. So-called identifiable public spending in Scotland – which excludes issues such as defence that cannot be pinned down to one part of the UK – is about 14 per cent above the UK average. Devolved spending is something like 18 per cent above the UK average.

There is much argument about why this happened, and whether it’s fair. Some of it is easy to justify. Social security spending depends on the needs of individual claimants, including the lingering after-effects of 1980s deindustrialisation. But, mostly, it is driven by the population age structure – pensions are the overwhelming part of this bill.

Creating a needs-based justification for devolved spending is a bit harder. We can’t really plead poverty. Wales is a lot poorer than Scotland, but gets less spending overall – and markedly less on devolved services such as health and education. The Welsh reckon they are shortchanged by 2 or 3 per cent of public spending but that Scotland deserves much less than it gets, if you think that needs matter. Today’s debate is not about spending but taxation. Who pays for all this? Is it really the long-suffering English taxpayer shelling out for generous Scottish public services? Or does Scotland pay its own way, and even subsidise the UK, as SNP ministers say?

The answer depends on how we look at oil revenues. How the figures are presented matters for Scotland inside the UK. More importantly, the future of oil revenues is the most important fiscal question for Scottish independence. The implications of the numbers are sobering, whatever happens.

Look first at the GERS estimates of normal taxation. As taxes aren’t collected geographically, the numbers are subject to quite a bit of uncertainty. Nevertheless, we’ve seen for some years that Scotland collects slightly less per head in tax than the UK average. That’s more or less what you would expect – Scotland is slightly below measured UK economic activity.

If that was all there was to it, Scotland would have a big problem. It would be running an even bigger deficit than the UK, and would have to cut public spending by 10 per cent or more even to get to the fiscally parlous state of the UK as a whole. There would be something in the “subsidy junkie” charge.

But revenues from oil have made a big difference. For the UK as a whole, during the 1980s, they balanced the books. Even at today’s reduced level, Scotland’s estimated share of them impacts hugely on the country’s estimated fiscal balance. The income varies markedly from year to year, as the oil price fluctuates, but has averaged about £6 billion a year since devolution, adding more than 10 per cent to Scotland’s annual tax take.

Let’s be clear, however, it doesn’t make Scotland a country in surplus. Since devolution, even after taking account of a geographical share of oil, Scotland has run an overall deficit. GERS includes capital spending, but Scottish ministers have a bad habit of leaving it out and claiming we are in surplus.

Nevertheless, a geographical share of oil has allowed them to claim that Scotland has been in a relatively better fiscal position than the UK as a whole.

While Scotland is in the UK, this is an interesting debating point, and fuels the argument about who gets what share of public spending.

Everywhere, the parts of a country that generate tax revenue demand to keep more of it, whether it’s a natural resources bonanza, or taxation from other economic activity. Look at Alberta, or Northern Italy, where the desire to keep tax income locally fuels demand for devolution; or even London where mayor Boris Johnson would like to get his hands on more of the City’s tax income.

But what happens if Scotland becomes independent? If Scotland gets most of the oil tax revenue; oil is the country’s biggest asset. What are the implications?

Two things immediately jump out. First, we’ve always known oil will one day run out. No-one knows exactly when because no-one knows exactly how much there is and, more importantly, no-one knows what the future price of oil will be – and that will determine how much is worth extracting.

Forecasts of the revenue vary, but they all show the same trend. The UK Office of Budget Responsibility estimates are as good as any – and they are not encouraging. They forecast a sharp drop-off, from £11bn in 2011 to £4bn in 2017. It is striking just how quickly that makes a difference to Scotland’s position. Estimates by the Centre for Public Policy for Regions at Glasgow University last year suggested that the decline in oil revenues would reverse Scotland’s relative fiscal advantage compared with the UK as soon as 2015. Oil prices and production are erratic, so we don’t know for sure, but whether it’s that year or a few years afterwards, this is a very important shift.

Second, oil revenue is volatile. Since 1999, annual UK income has been as low as £2bn and as high as £12bn. That difference is more than the budget of the NHS in Scotland. The Scottish Government’s Council of Economic Advisers recommended that a country with oil revenues should be putting them into a fund for the future. That’s prudent long-term planning and a good way of dealing with the volatility. Perhaps we should have been able to do so in the past – but we weren’t. If Scotland was to become independent, it would surely be the right thing to do. But we can’t do that and spend the money. The implications for public spending are significant. Domestic Scottish taxes could pay for less than 90 per cent of what we spend now.

So oil matters hugely in the independence debate. “It’s Scotland’s Oil” was a great slogan in the 1970s. The lesson of GERS in recent years, and of today’s figures, is that it’s not so simple now.

• Jim Gallagher is a fellow at Nuffield College, Oxford. Scotland’s Choices by Iain McLean, Jim Gallagher and Guy Lodge will be published by Edinburgh University Press in April