Peter Jones: Stormy waters for Scots oil income

NEW figures on spending and revenues will show how a fiscally independent Scotland, would struggle, writes Peter Jones.
A $60 a barrel oil price is still nowhere near enough to re-balance Scotland's books. Picture: Getty ImagesA $60 a barrel oil price is still nowhere near enough to re-balance Scotland's books. Picture: Getty Images
A $60 a barrel oil price is still nowhere near enough to re-balance Scotland's books. Picture: Getty Images

Prepare for a barrage of heavy-duty public finance statistics tomorrow as the annual statistics on government expenditure and revenues in Scotland (Gers) are published.

Prepare also for an equally heavy bombardment of political claims and counter-claims – Scotland can pay its way, or it can’t. For those who prefer reality to unionist/nationalist fantasies, here’s a few tips to interpreting the numbers.

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The bottom line in these figures is how the total amount of Scottish and UK government spending in Scotland matches up to the total amount of taxes raised in Scotland. If we spend more than we raise, we’re in trouble; if we raise more than we spend, we are fine.

At this point, you may well say: “Excuse me, but didn’t we vote No to independence last September? And as we did, are we not staying in the Union where it doesn’t matter so much whether we spend more or less than we pay in taxes?”

That’s only true up to a point, the point being that the SNP is pledged to campaign for full fiscal autonomy in May’s general election. And if they are in a position to secure that from a likely UK government, then that’s what they will demand.

To quote from the Scottish Government’s submission to the Smith Commission, this means that “all onshore and offshore taxes would be designed and set in Scotland, including tax rates, allowances, thresholds, and the tax bases. An exception might be VAT – and potentially some excise duties – because EU rules require them to be largely uniform across the UK. For any reserved taxes, revenues would be assigned to the Scottish government.”

On the spending side, the same document says that Scotland would take responsibility for key elements of domestic spending, including welfare and make a direct payment to the UK for UK government services received by Scotland which would include “agreed amounts for defence, security, foreign policy, and servicing of historic debt interest”.

An interesting omission from the document is any calculation of what this would actually look like, whether Scotland’s public balance sheet is in the red or in the black, and in either case, by how much. Tomorrow’s Gers numbers, covering the financial year 2013-14, help fill that gap.

We know a bit about what they will look like because we can look at previous years. In 2012-13, total public spending in Scotland, including the cost of the shares of UK services outlined above, was £65.2 billion. Total onshore taxes amounted to £47.6bn and an (independently) estimated share of offshore taxes added a further £5.2bn, making total tax revenues of £52.8bn.

A quick sum tells you that taxes fell short of revenues by £12.4bn (the deficit), meaning that in 2012-13 Scotland was in the red and not paying its way. But, you may say, the UK was also in the same bad place, so surely that means Scotland can still go ahead with full fiscal autonomy?

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The standard way of comparing national balance sheets is to express the size of the deficit/surplus as a percentage of the whole economy as measured by gross domestic product (GDP). Scotland’s deficit in 2012-13 turns out to be 8.6 per cent of GDP (including a due share of offshore GDP), somewhat more than the UK’s deficit of 7.3 per cent of GDP.

This is not good news, particularly as Scotland’s deficit appears to be getting bigger (up from 5.8 per cent in 2011-12), while the UK’s is getting smaller (down from 7.6 per cent).

The reason, of course, is the volatility of oil revenues.

Total UK offshore taxes were £11.3bn in 2011-12, but then nearly halved to £6.6bn the following year.

In the UK, the effect is tiny, amounting to a less than 1 per cent revenue reduction. But in Scotland, the effect is big, adding up to an 8 per cent reduction. The lesson is pretty clear – without decent oil revenues, Scotland has no hope of getting out of the red without making swingeing spending cuts. Without the oil money, Scotland’s deficit in 2012-13 was £17.6bn or 14 per cent of GDP. That is completely unsustainable. International standard practice is that deficits should be no more than 3 per cent of GDP or, in Scotland’s case, about £4.2bn.

All this, of course, is historical. We really need to know what is a reasonable estimate of future deficits. That’s where the price of oil really matters. The higher it is, the bigger are the oil company profits from North Sea production on which the taxes are levied.

And we know that, quite unexpectedly, the price of Brent crude fell from a high of $115 a barrel last June to less than $50 in January. Although it has recovered to around $60 this month, that is still nowhere near enough to re-balance Scotland’s books – at a rough estimate, only a price of around $120 would do that.

Barring cataclysmic upheaval in the Middle East, nobody – and certainly not the bosses of Shell and BP – thinks such a price will arrive any time soon.

By the way, Scottish oil revenues in 2013-14, Gers will show, would have been about £4bn, down again on the previous year. And for 2014-15, they will be even less with just under £1bn having been paid in the first six months.

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This is the reality that Scotland would have to cope with under full fiscal autonomy. Any prudent public financial planning would have to assume low oil revenues and trim public spending to suit. Actually, that would not be a trim, but a massive slash of about £10bn, almost equivalent to the entire NHS budget.

How the SNP can possibly think that this would be a good deal for Scotland is utterly beyond me. It makes George Osborne’s cuts look like little grazes.

There is, I agree, an intellectual case for Scotland being much more self-reliant. But the supporters of that argument first have to explain how they would either raise more in taxes or spend less before the case for using tax powers has any validity.

That, they have signally failed to do.

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