Analysis: Reliance on volatile oil price a tricky position

THE position for Scotland is interesting - the effect of the Barnett formula and the relatively low tax yield of Scottish onshore activities would have created a substantial deficit, except for the oil receipts, which in 2010-11 would have been just under £8 billion using the allocation recommended by Aberdeen University experts.

After adding in Scotland’s share of the oil revenues, the deficit for a hypothetical independent Scotland emerges as 10 per cent of GDP, which by coincidence is exactly the same figure as the UK figure on the same definition.

These figures do not include the net cost of banking bailouts for RBS and Lloyds HBOS. They are based on the 2010-11 position when the price of Brent crude was on average $82.33 per barrel. In 2011-12 we estimate an average price of $110.54, which would improve Scotland’s finances by about £3bn.

What does this say about Scottish independence? Alex Salmond’s claim that Scotland subsidises the rest of the UK is not supported by this data, but, equally, the claims commentators that the English subsidise the Scottish welfare state are not supported either.

Of course this analysis does not take account of all the economic issues that might emerge if Scotland were to be independent. Set-up costs for a new country are not included. On the other hand, an independent Scotland, as a relatively small nation, might not choose to spend in some of the areas such as defence that are appropriate for a medium-sized power like the UK.

The public finances of an independent Scotland would be highly dependent on oil revenues, which are very volatile. Our analysis from last year showed the onshore Scottish economy had not been strong and is gradually falling behind even the rest of the UK. Crucially, even after taking the oil revenues into account, Scotland would still have had a deficit of about the same share of GDP as the UK – 10 per cent in 2010-11.

So an independent Scotland would have to take similar austerity measures to those the coalition is already implementing nationally. And establishing a credit rating for a new country would probably require rather more prudence.

• Douglas McWilliams is chief executive of think-tank Cebr.