The zombie parliament is a million miles from fixing the oil and independence conundrum - John McLaren

The conundrum around oil and independence has been highlighted by this year's Government Expenditure and Revenue Scotland (GERS) report and goes something along the lines of ‘don’t want it but can’t do without it’.

Courtesy of the war in Ukraine, oil and gas prices have soared and geographic based ‘Scottish’ oil revenues have risen from a desultory annual average of £0.7 billion over the financial years 2014-15 to 2020-21, to a very substantial £9.4 billion in 2022-23.

Good news, except for the fact that the SNP/Greens coalition in Scotland wants to end North Sea activity, and sooner rather than later.

In fact it is the Scottish balance without North Sea revenues that remains the most relevant figure, in terms of the independence debate, as either the oil revenues will have been relinquished for environmental reasons, or, whatever level of the highly erratic taxes finally emerges, it will be set aside as a Fund to help with net zero transition costs, independence transition costs or some form of Fund for the Future. On this basis, the underlying deficit differential between Scotland and the UK is unchanged in recent years, standing close to 10% of GDP, which is equivalent to well north of £15 billion.

Spending wise, that covers over 15% of the entire (i.e. UK and Scottish Government sourced spending combined) Scottish Budget. Revenue wise, raising all rates of income tax by 10p would only fill £5 billion of the gap. So we are not talking about inconsequential amounts here and any potential ‘estimation error’ over the data pales into insignificance in comparison with such figures.

One SNP line of defence is that this only shows the position under the Union, not under independence. But that is the point. Andrew Wilsons Growth Commission report apart, the SNP have shown great reticence in describing what would be different and so what any new balance would look like.

The fundamental issue remains that Scotland’s fiscal position deteriorates at the point of independence, as a substantial transfer from the rest of the UK is lost. This loss in funding could be offset by raising taxes or by cutting spending or by increasing borrowing, but each of these has a cost to Scottish households, in terms of less disposable income or a lower level of public service provision.

This underlying - onshore - position has always been the case but in some years was compensated for, and sometimes over compensated for, by oil and gas revenues. Now that erratic alternative source of filling the non-oil gap is, for whatever reason you choose, no longer available. As I say, this challenge is fundamental to the finances of independence and yet, like questions over currency and post Brexit borders, answers to it keep being fudged.

There are many relevant issues that could be addressed to help resolve the situation. What size of a defence budget does an independent Scotland need? What sort of a deal could Scotland negotiate over keeping Trident? Where else might Scotland and the rest of the UK co-operate in order to reduce costs? Can more efficient, pro growth, taxes be introduced? All fine and well but not touched with a bargepole in the current wonderland of SNP independence thinking.

You can be pious and say NO to nukes and NO to oil, at any price, or you can be more ‘real politics’ about it. That choice applies to almost all of the independence arguments. Secession is never going to be simple, there will be costs and they will be higher the more red lines are imposed and ‘reasonable’ compromises are excluded. Brexit, surely, has taught us this lesson well.

Are there alternatives? Not easy ones. Derek Mackay’s ‘alternative’ GERS, announced in 2020, never saw the light of day, which is probably just as well as it is likely to have been another attempt at twisting hard truths into easy answers. Kate Forbes still supports the idea but, as she was a member of the original Sustainable Growth Commission, its difficult to see how she could have radically changed her position in such a short space of time.

Meanwhile, extravagant claims that GERS is biased and unreliable have little credibility. As the Institute for Fiscal Studies (IFS) point out “their status as National Statistics means they have been independently assessed as being based on sound methods and being produced free from political interference. And they are widely recognised as a sensible starting point for assessing the kind of fiscal challenges and opportunities than an independent Scotland would initially face – for example by the Fraser of Allander Institute and the SNP’s Sustainable Growth Commission of 2016–18.”

The real alternatives are the unspoken ones referred to above, or to some form of revised Union, more than federal but less than full independence. In fact, something along the lines of a British EU, where some cross subsidy across the Union still occurs.

We are a million miles from a real debate over any such ‘New Deal’, and, other than the Growth Commission report, have been since the first referendum.

Its not as if such a dialogue has been crowded out by a full schedule of implementing innovative, devolved, policies. The Parliament is largely moribund. In the absence of actually moving towards independence, it is a zombie institution, that is one which is alive but, as the dictionary puts it, “has no energy, seems to act without thinking, and does not notice what is happening”.

John McLaren is a political economist who has worked in the Treasury, the Scottish Office and for a variety of economic think tanks.