Analysis: Report shows importance of North Sea oil to Scotland

Report shows importance of North Sea oil to Scotland's prospects. Picture: Getty
Report shows importance of North Sea oil to Scotland's prospects. Picture: Getty
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THE latest version of the GERS report provides us with an insight into the fiscal position of a more independent Scotland.

In the absence of a full set of national accounts, including its Balance of Payments, it is one of few sources available by which to judge the economic and fiscal conditions a post-independent Scottish Government would face.

It tells us that Scotland’s (non oil) tax revenue share in 2010-11, at 8.3 per cent of the UK total, remains near its population share (8.4 per cent). Its public expenditure share in 2010-11 (9.3 per cent) is above its population share, but has been falling since 2007-8 (9.6 per cent). It’s geographical share of North Sea revenues in 2010-11 (91 per cent) was mid-range from recent peaks (95 per cent in 2007-8) and troughs (84 per cent in 2006-7).

These elements show that Scotland’s overall fiscal balance in 2010-11 has improved over 2009-10. However, it remains substantially in overall deficit. Much of this improvement can be put down to a rising oil price raising North Sea revenues. For the third year in succession, Scotland’s relative deficit was smaller than the UK’s, and CPPR estimates this will remain true until 2013-14. After that, as North Sea revenues decline, Scotland’s relative balance becomes slightly worse than the UK’s.

The importance of North Sea oil revenues to these relative positions is vital; had projections from the time of the UK Budget last year been used, oil revenues would have been nearly £4 billion higher in 2016-17 and Scotland’s relative balance would have remained better than the UK’s up to 2016-17. This illustrates the importance of changes to assumptions involving North Sea revenues to Scotland’s absolute and relative fiscal position.

The new GERS figures also throw up some interesting anomalies. For example, Scotland’s share of the total UK tax take in relation to income tax (IT) remains low (7.3 per cent), while its corporation tax (9 per cent) and VAT (8.8 per cent) shares are high, in comparison with its population share (8.4 per cent of the UK).

How might these figures be affected by greater fiscal devolution? GERS looks at the position as if Scotland were fiscally autonomous, which would apply under independence and probably under devo-max. Under devo-plus, the Scottish Government has partial control of taxes. Such a system complicates, via increased or reduced borrowing, how any Scottish spending reliant on these highly erratic revenues would be managed.

GERS is simply a snapshot of a part of what would be Scotland’s full national accounts. It cannot tell you how fiscally sound an independent Scotland would be, as this rests on a large number of variables: the price and output of North Sea oil; government tax rates (eg, over corporation tax) and spending plans (eg, over defence spending); as well as the country’s growth rate.

It does tell us that, at present, excluding oil revenues, the Scottish position is relatively worse than the UK’s, by 5-6 percentage points of GDP, and that, post-independence, substantial oil revenues would need to be maintained to close this gap.

• John McLaren is a senior researcher at the Centre for Public Policy for Regions.