Flatlining tax revenues are bad news for the Yes campaign, for many Scottish companies and for jobs, writes Peter Jones
OIL revenues and their importance to the independence debate will be big news this week. And, while this may seem counter-intuitive, while the discussion will be around big falls in offshore tax revenues, I suspect there will also be some chat about whether the tax rates levied on offshore profits should be reduced.
Tomorrow, Scottish Government statisticians will publish their annual estimates of government spending and revenues in Scotland (Gers). I expect they will show that the relatively favourable (compared to the UK) deficit of spending over tax revenues that Scotland had in 2011-12 disappeared in 2012-13. It doesn’t take a genius to know that this will have important political consequences.
To recap on some figures, in 2011-12, and including a Scottish share of UK government spending on debt, defence, etc, total public spending in Scotland exceeded taxes raised on onshore activity by £18.2 billion or 14.6 per cent of GDP. But when you include the estimated Scottish share of oil revenues, which was £10.6bn, Scotland’s spending deficit dropped to 5 per cent of GDP.
This was better than the equivalent UK deficit for that year, of 7.9 per cent of UK GDP, enabling Alex Salmond and the Yes campaign to pump out the message that Scotland’s public finances are in better shape than the UK’s, so we would be better off under independence. This will change with the publication of the Gers figures for 2012-13. I expect these to show that the onshore deficit has reduced, probably to about £16.5bn or about 12.5 per cent of GDP. If the oil revenues were as good as they were the previous year, then Salmond could carry on claiming that Scotland was in a better fiscal position.
But they won’t be. Total UK offshore taxes fell from £11.25bn to £6.5bn in 2012-13, of which Scotland’s share could reasonably be expected to be about £6bn. That in turn means that Scotland’s total deficit for the year will be about 8 per cent of GDP. Citigroup, a big American bank, reckons it will be about 7.9 per cent of GDP. This is above the UK deficit for the same year of 6.8 per cent, when the one-off effect of the Royal Mail pension fund transfer is excluded.
This, rather obviously, is not good news for the Yes campaign. It is one reason why it is mounting a big advertising blitzkrieg. Hoardings are to be plastered with quotes from august sources such as the Financial Times talking about Scotland’s relatively better public finances, healthier economy, etc. The quotes, unfortunately, refer to historic data that is about to be overtaken.
Now, I am not saying that Scotland is too poor, too wee, too stupid to be independent. But I am saying that if Scotland is going to be independent, then we will have to either cut spending or raise taxes in order to balance the public sector finances. Deficits that are more than 7 per cent of GDP, you will recall from the eurozone crisis, are generally reckoned to be unsustainable, causing national borrowing costs to rise unless, that is, there is a credible plan in place to bring them back towards balance.
Here, Citigroup had an interesting suggestion. It thought that Salmond’s threat to refuse taking on a share of UK debt if sharing sterling was refused by the UK government was not wholly a bluff. This would carry a price, the bank noted, of a “default premium on future borrowing” but would also cut Scotland’s fiscal deficit by about 3 per cent. If you add intended defence spending cuts, that would bring Scotland’s deficit down to 4 per cent of GDP.
That’s risky because it might incur an even heavier price of retaliatory measures by the UK government, such as quibbling about the North Sea boundary, which would hold up Scotland’s European Union membership application, or ending payments from English and Welsh electricity consumers supporting Scottish renewables, which would be disastrous for the industry and its jobs. So I don’t think that is likely.
You might also argue that the dip in oil revenues is transitory. Part of the reason for the fall is that investment is at record levels (which reduces tax liabilities) and presumably companies don’t invest billions without thinking they are going to get them back in the shape of profits.
Unfortunately, the Office for Budget Responsibility (OBR) reckons that revenues are going to stay flat for some time. With most of the revenues for this year in, the projected total UK tax take for 2013-14 is £5bn, of which Scotland might get £4.5bn. The OBR projects a gradual decline until 2017-18, when it thinks total UK revenues will be £3.9bn, of which Scotland’s share should be £3.6bn. The Scottish Government criticises these figures as being too pessimistic. In fact, historically, the OBR has been almost as over-optimistic as the Scottish Government. In March 2011, it reckoned revenues in 2012-13 would total £12.8bn, almost twice what they have turned out to be.
And the global background in which the industry operates is making the North Sea, where costs inflated by 15 per cent last year, look unattractive. Last November, Chevron and Statoil postponed decisions to invest a total of £10bn in two new fields with about 500 million recoverable barrels of oil between them. West Africa, where there are still much bigger fields to be found, and North America, where fracking is galloping along, look much safer investment bets.
And that’s why I think offshore tax cuts look necessary. Compared to the onshore corporation tax rate of 21 per cent, the offshore rates of 62 per cent on new fields and 81 per cent on older fields are a crippling penalty and have to be a real deterrent to investment.
This is also important for the onshore economy. The North Sea’s testing environment has been a proving ground for all sorts of new technologies, which many Scottish companies are now exporting globally. And if the North Sea’s decline steepens into a tumble, many of those firms may have to move to where their customers are.
While this week’s headlines may be about tax revenues and the political fallout, the real story, as the recent Oil & Gas UK activity report said, is about an industry in crisis and an awful lot of jobs under threat.