Slump in oil price would put go-it-alone Scotland in red

Published on Wednesday 22 June 2011 15:48

SCOTLAND'S heavy reliance on North Sea Oil in order to balance its books was illustrated by new figures yesterday showing how the country tumbled into the red as oil revenues crashed during the recession.

The annual Gers report – which sets out the country's balance sheet – showed how North Sea oil revenues halved in 2009-10 compared with the previous bumper year.

The cash squeeze on the government's finances was exacerbated by the fact that spending surged as the recession tipped more Scots into reliance on social security benefits. As a result of both, the report found Scotland's net deficit for the year, with North Sea Oil receipts, was nearly 14 billion, or 10.6 per cent of GDP.

However, the Scottish deficit in 2009 was less than that run up by the UK as a whole in the same year, which amounted to 11.1 per cent as Whitehall borrowed 165bn in the wake of the financial crash.

The figures led to a fresh clash between the SNP and unionist parties last night over the viability of independence. The annual Gers figures provide the most authoritative picture of how the books of an independent Scotland would appear.

SNP ministers highlighted that the figures showed how Scotland's share of tax revenue to the UK Exchequer - 9.4 per cent - was higher than the country's share of population - 8.4 per cent - to argue that the figures showed the relative strength of the Scottish economy.

Supporters also noted that the slump in North Sea oil revenue had ended, and with the Exchequer now receiving record tax revenues, Scotland's public finances would by now be back in balance.

But unionist opponents claimed the country's very reliance on volatile North Sea oil income would cause havoc for Scotland if it were independent, with huge annual swings in revenue always a possibility.

The overall net figures showed that, with oil revenues included on a geographical basis, an estimated 48.1bn was collected in tax from Scotland during the financial year. Meanwhile, spending surged to hit 62.1bn.

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The tax income was hit badly by the fact that oil revenues fell from 12.9bn in 2008-09 to just 6.5bn in 2009-10, as global demand for oil slumped in the midst of the recession. Despite the fall in the oil price, the North Sea still provided 1 in every 7 in tax collected in Scotland.

The books then were further unbalanced by increases in government spending during a year which saw all parts of the UK combating the worst of the recession. The report revealed that spending on unemployment benefit shot up from 406 million in 2007-8 to 605m in 2009-10, a rise of 49 per cent.

In total, spending in Scotland on social protection - pensions, benefits and social work costs - rose in a year from 18.6bn to 20.1bn, the largest single element of government spending.

That 8 per cent increase was far larger than spending increases in health, where spending rose by 4 per cent, and on education and training, which rose by just 2 per cent.

Finance secretary John Swinney put forward both recession-linked issues as an explanation for the deficit yesterday, and claimed the long-term picture was therefore brighter.

He said: "We know that Scotland's oil and gas resources represent a trillion pound asset base - worth more than ten times Scotland's share of a UK debt built up by successive Westminster governments And we also know North Sea revenues are on a sharply rising curve - in 2010-11 they were 8.8bn, and this year the North Sea is forecast to generate an all-time record 13.4 bn in tax revenue."

Supporters of financial independence also argued the deficit amounted to a recession blip.

Ben Thomson, director of the Campaign for Fiscal Responsibility, said: "The Office for Budget Responsibility, in its 2011 Budget Report, estimated that North Sea revenues would average 13.4bn over the next five years, of which Scotland's geographic share would be 12.2bn. This is more than double the revenue levels in 2009-10 and would bring Scotland's net fiscal position close to balance."

But unionist opponents argued the volatility in the oil price underlined the difficulties an independent country would face - while noting that, even with the proceeds from oil, Scotland was in the red.

Scottish Labour finance spokesman Richard Baker MSP said: "We should not rely on a commodity whose price is completely out of our control."

Gavin Brown, Scottish Conservative economy spokesman, said: "The SNP continually tells us that a separate Scotland would pay for itself via the North Sea oil revenues, a claim that is blown apart by these figures."

Scottish Liberal Democrat leader Willie Rennie MSP said: "The SNP must come clean on the cost and implications of independence so that we can all have a mature discussion about Scotland's future."

The think-tank the Centre for Public Policy for Regions (CPPR) released forecasts for the next five years last night which showed that Scotland's deficit would fall every year over the period, as oil prices recover. Its analysis also suggests Scotland's deficit would remain lower than the UK's over that five-year spell.

The need to use oil revenues to fund public services would also prevent a Scottish Government from setting up a dedicated Norwegian-style oil fund to invest in the future, it added.

CPPR director Richard Harris said: "Gers 2011 shows that without North Sea oil revenues, the fiscal position continues to reflect the higher public spending per head in Scotland and a relatively lower tax base."

The figures also showed that Scotland continued to receive more funding per head of population than the rest of the UK. Each person in the country has 11,370 spent on them, 1,050 more than the UK average.

However, the SNP rejected the claim that Scotland is therefore being subsidised by the rest of the UK, because of its above- average tax receipts.

Scottish Secretary Michael Moore argued that the figures made a "compelling case" for Scotland remaining in the UK,

He added: "The variations of the oil prices are far better managed in a UK-wide economy. It means Scotland can benefit in the good times and manage its risk effectively when the price drops. As part of the United Kingdom, we share in the risks and we share in the recovery".