Oil price fuels fresh row on Scots 'deficit'

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SCOTLAND'S economy would have had a budget deficit of £2.7 billion last year – even with its "geographical share" of North Sea oil revenues, official figures have found.

Without oil revenues the same Government Expenditure and Revenue Scotland (GERS) report showed that the deficit would have been 10.2 billion.

But the figures – drawn up by Scottish Government statisticians, who insisted there was no ministerial interference – also suggest that Scotland is in a stronger position than the rest of the UK if oil is taken into account.

The new report, which goes to the heart of the debate over whether Scotland could survive financially as an independent nation, is the first GERS investigation to be published under the SNP administration.

The SNP seized on a figure that suggested Scotland would have a budget surplus of 837 million if it was given 83 per cent share of North Sea revenues. The surplus changes to a deficit of 2.7 billion when capital costs for projects such as roads, schools and hospitals are included.

The figures were calculated on an average price of $65 per barrel during 2006-7. The 2008 average figure is $120, a point John Swinney, the finance secretary, was keen to emphasise. "As North Sea oil revenues soar, the City accountancy firm Grant Thornton estimates that Scotland's surplus would now stand at some 4.4 billion," he said.

But the figures have been disputed by the UK Treasury, which argued that some costs have not been included, such as Scotland's share of nuclear power station decommissioning costs.

"The fact of the matter is that in Scotland borrowing is higher than the rest of the UK; tax receipts per person are lower and spending per person is higher," a Treasury spokesman added.

The Scottish Government accused the Treasury of double standards in its argument.

"They want us to use the actual spending in Scotland for decommissioning because it is greater here, but on things like defence spending they use the per capita formula when most of the money is spent in the south of England," a source close to Mr Swinney said.

But the Centre for Public Policy for Regions, an independent think tank based at Glasgow University, issued a warning to the SNP.

Professor John McLaren said: "There are some difficult questions to be answered here. Oil is not a product that can be relied upon for the long term. Its price fluctuates and the amount coming out is reducing.

"This report shows that something has to be done about the underlying 10 billion deficit if Scotland were to be independent. And if the SNP create an oil fund they have to remember that would take money away from balancing the books."

The analysis was supported by the pro-independence Greens, who have warned that peak oil production has now passed and a different economic model is needed.

Derek Brownlee, the Conservatives' finance spokesman, was also dismissive. "As a fuel crisis sweeps the globe, the SNP is trying to build the case for independence on the volatile price and diminishing supply of oil," he said."The SNP seems to be highly selective in its crystal ball gazing – for example the accompanying study only runs until 2013 and ignores the North Sea Oil decommissioning costs, which might well produce much smaller or even negative oil tax revenues in later years."

Scottish Labour pointed out that the SNP used to attack the GERS report until it supported their argument.

And Tavish Scott, the Liberal Democrats' finance spokesman, accused Mr Swinney of "cherry picking", adding: "What the figures do show is a clear case for Scotland to remain part of the UK, but raise as much of its own spending as practical."

Nationalists have some hard choices to make

OIL could be the lubricant that makes the Scottish economic machine tick.

The Government and Expenditure and Revenue (GERS) report for 2006-7 confirms this but also shows that, without this unpredictable commodity, Scotland's books are in poor shape.

When all spending is taken into account, Scotland would still be running at a deficit of 2.7 billion.

This means that if Scotland were independent and continued with its same spending, then it would be largely reliant on a finite resource with a highly variable price and unknown future costs.

As the Centre for Public Policy for Regions warns, this is not a secure basis for an independent economy and if the SNP is to fulfil its dream then it needs to decide what it will do with the underlying spending deficit of more than 10 billion.

This is as true if a Norwegian-style oil fund were to be created. Any money put into a fund is less that can be used to meet the balance of payments.

So GERS may prove that Scotland would be viable as an independent country, but it also shows that the Nationalists need to start looking beyond oil and make some hard decisions between high taxation or much reduced services if they are to come up with a realistic vision.