Comment: Difficult economic times lie ahead
ECONOMISTS? You can’t believe a word they say. So says an economist who has let fly at fellow forecasters in his latest monthly report.
Tony Mackay, based in Inverness, has described himself as very disappointed by the contribution of economists to the independence referendum. “Most were poor”, he says, “a few appalling and even fewer good.”
Few are spared in the Mackay Massacre: the Scottish Government’s “so-called” independent Fiscal Commission (its currency report recommending the retention of sterling) was “very unconvincing … a very poor piece of work with many unsubstantiated claims”.
The Scottish Government’s oil and gas reports are also attacked for being “based on optimistic assumptions – not just for production but also for reserves, oil prices and revenues… far too optimistic”.
The report on the oil and gas industry by Tulloch Energy and Biggar Economics for the N-56, pro-independence think tank comes under fire – described by Sir Ian Wood as “an insult to the Scottish people” – and that, says Mackay, “was probably being polite”.
The Scottish Government and Scottish Enterprise reports, “particularly concerning the oil and gas industry, were both politically biased and very misleading”, and the National Institute for Economic and Social Research’s “by far the worst”.
Only one person is left standing as the smoke drifts from this blazing burst of the Mackay machine gun: Professor David Bell and colleagues at Stirling University.
Ferocious fire – but what’s really new here? Few economists are without bias. It’s a dog-eared charge. And most voters already had a healthy scepticism over the forecasts from both sides.
Anyway, the referendum is history, so why should any of this matter?
There are two reasons. First, the referendum rammy is far from over. The battleground has shifted to “more powers”, with arguments set to intensify over control of income tax, inheritance tax, other capital taxes, a share of VAT revenues, control of energy policy and powers over welfare disbursements.
And the more powers secured for Holyrood, the more intense will the arguments become over the Scottish Government’s revenue and spending projections.
And second, the dramatic slide in the price of oil – at $78.92 a barrel it has plunged 32 per cent from its summer high of $115. And this looks to be no “temporary blip”. The 29-country International Energy Agency believes we are seeing a major step change in the world oil price. “Downward price pressures”, it says, “could build further in the first half of 2015.”
In the US, with sharp rises in oil and gas supply, there is talk of reserve stocks rising close to capacity, with forecasts that the price “will likely continue to fall in the coming months to as low as $50 per barrel”.
Now no-one can reasonably expect economists to forecast future oil prices with any exactitude. Many variables are involved – US supply, Chinese demand, geopolitical tensions in Ukraine and the Middle East and the pace of global growth.
But there is little doubt that there has been a sea-change in oil prices in the past three months. This is set to consign the acres of referendum campaign forecasts of North Sea oil production and revenues to the dustbin.
What now? A great omerta seems to have befallen political discussion in Scotland over the oil price slide. As Lord Smith’s Commission scrambles to achieve all-party agreement on “more powers” within the 30 November deadline, the oil plunge has become the equivalent in Scotland of “don’t mention the war”.
Yet we are going to need a fresh and altogether more hard-headed analysis of the outlook for the North Sea sector, of Scotland’s economy – and crucially, the consequentials for governments, both in Edinburgh and London.
There will be a knock-on effect on investment – the Brent crude average price of about $105 per barrel in recent years encouraged investment in new field developments, but with a 30 per cent plus price fall, that investment will be curtailed.
And there is certain to be an impact on tax revenues. The SNP’s base case assumption was an average Brent price of $113 in real terms. That prediction – and the budget surplus and spending ambitions that came to rest on it – now looks very questionable. Last month Scottish Secretary Alistair Carmichael estimated that an independent Scotland would be staring into an £8 billion budget black hole.
For now, this remains Chancellor George Osborne’s problem as he wrestles with tax and spending forecasts in time for the Autumn Statement on 3 December.
But there is a contingent concern for a future Scottish government that may find that the fiscal lever of income tax assumes even greater importance under “more powers”.
The problem here is that, due to demographic pressures, income tax may disappoint as a reliable source of ever rising revenues due to an ageing population.
That would compel a future Holyrood administration to look towards higher yields from inheritance tax and other capital taxes. This would have the added advantage of avoiding a vote-losing income tax hike and placing the burden on those unlikely in any event to have voted for a left-of- centre SNP government.
Higher inheritance tax, capital gains tax and other capital taxes would be a major disincentive for Scotland’s financial services sector. In addition, there is already talk of unfreezing council tax and capping business rates relief for small firms. For business, that does not look good.
The apprehension and uncertainty many felt during the referendum campaign has not at all diminished Indeed, it is likely to increase.
After the oil price slide, “more powers” may well become as much of a curse as a blessing. The capital flight evident in the final weeks of the independence referendum looks set to return with a vengeance.
A prize awaits any economist who can forecast what now lies ahead for Scotland – and an extra prize for anyone who can offer the future finance secretary a way out. «
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