Peter Jones: Dump fiscal autonomy – it’s insanity

As the price of oil has plunged, so has the case for Scotland securing extensive new powers, writes Peter Jones

Nicola Sturgeon is applauded by the faithful. Party membership has quadrupled to 100,000. Picture: Greg Macvean
Nicola Sturgeon is applauded by the faithful. Party membership has quadrupled to 100,000. Picture: Greg Macvean

An opportunity now exists, thanks to the sudden and unprecedented decline in the price of oil and the dire effect this has had on Scotland’s public finances, to redefine the central purpose of Scottish politics. Moreover, the opportunity is in a strategy that any party, whether nationalist, unionist, left, or right, could pick up. Are any of them brave enough to do it?

For most of the nearly four decades I have been reporting on Scottish politics, nationalism and the pursuit of independence has been a major dynamic driving political thinking. In the 1980s and 90s, it faded into the background as the goal of devolution became the dominant story.

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The creation of the Scottish Parliament in 1999 opened the way for nationalism to return to dominance, culminating in the 2014 independence referendum. Surprisingly, despite losing that vote, the SNP has surged and appears, according to opinion polls, to be heading for a landslide Scottish victory on a par with the Labour landslides of the 1980s and 90s.

This surge, in membership (now quadrupled to 100,000) and support, seems to give the leadership little option but to proclaim that independence is still achievable, and soon – at least within her lifetime, according to Nicola Sturgeon.

Meantime, she wants full fiscal autonomy – the ability to control all taxes apart from VAT and tobacco/alcohol duties (but still collect the revenues from them) and all welfare spending. It would be fiscal independence and, as such, since it leaves little rationale for the Union, would be as close to independence as makes not much difference.

And yet this is an insane time to be pursuing such a policy. The analysis done by the Office of Budget Responsibility (OBR) and the Institute of Fiscal Studies (IFS) after last week’s UK Budget shows how dire full fiscal autonomy would be for the people of Scotland.

The combination of offshore oil and gas tax cuts (which were demanded by the SNP) and the depressed oil price (yesterday at around $55 a barrel, half the “prudent” prediction of $113 by the SNP in the referendum) means that total UK offshore revenues are likely to average just £700 million a year for the next five years.

Low oil prices also depress Scotland’s share of these (because costs are higher in Scottish waters, especially west of Shetland, from where most new production will come), so the Scottish public account will be lucky to see £600m a year, and £500m would be a more prudent estimate.

This is less than a tenth of the £6 billion plus per year that Alex Salmond was mentally banking during the referendum campaign. True, some offsetting effects such as the strengthening US dollar might push up the sterling value of a barrel, but it would be astonishing if oil revenues were to reach much more than £1bn.

It means that there is absolutely no possibility of Scottish public finances being in any fit state to ease austerity. Under either independence or full fiscal autonomy, there could only be harsher and longer-lasting austerity.

As I wrote last week, in 2013-14, according to Scottish Government statistics, total tax revenues, including a share of oil revenues, were £54bn and total public spending was £66.4bn, a shortfall of £12.4bn which equates to a deficit of –8.1 per cent GDP.

The IFS has since used the OBR’s oil revenue predictions and foresees Scotland’s deficit rising to £14.2bn in 2015-16, or –8.6 per cent of GDP. This, it says, is £7.6bn more than if Scotland’s deficit was the same as that predicted for the UK as a whole, which is –4 per cent of UK GDP.

That £7.6bn is what Scotland would have to find if the SNP was to secure full fiscal autonomy after May’s general election. The money is currently financed by the UK government through the Barnett Formula which, for public spending purposes, would only exist, presumably, for distribution of borrowed money – the remaining £6.6bn of the deficit.

Where on earth could a Scottish Government secure that kind of money? Not by borrowing on its own account, as its plan specifically mentions a fiscal pact with the UK government which would rule out any extra borrowing. It would have to come from spending cuts or tax rises.

Nor would it come from any supposed growth dividend from being able to better manage tax revenues and welfare spending. The Scottish Government recently published estimates by its economists of how the economy, jobs, and tax revenues would grow if there was an increase in productivity of 0.1 per cent a year, business investment was raised by 0.5 per cent a year, and exports were boosted by 50 per cent after ten years.

The result? Under full fiscal autonomy, it estimated additional growth of 6.8 per cent, an extra 161,000 jobs, and an increase of £3.5 billion in tax revenues. And that’s after ten years. So a decade after winning full fiscal autonomy, Scotland would have regained just under half of the £7.6bn. This is just insanity.

It also ignores an inconvenient truth. If there was any way of managing an economy to get out of public spending austerity caused by a deficit, do you not think that the governments of Greece, Ireland, Spain, Italy, or Portugal would have discovered it by now?

Scotland’s fiscal problem is not lack of tax revenues, it is public spending that is too high for the size of the economy.

And that means that to avoid condemning the people of Scotland to at least a decade of greater poverty, independence and full fiscal autonomy should be abandoned.

The way ahead should be not independence, but less dependence – on oil and the fiscal resources of the UK.

Only by growing the onshore economy at a faster rate than UK growth could Scotland hope to be in a position to secure either independence or full fiscal autonomy without inflicting severe pain on the Scottish people.

It has been done in the past and I’ll write about how it might be done in the future at a later date. Meantime, I still hope, albeit faintly, for some realism from SNP leaders.