GERS figures: High oil and gas prices funding Scottish economy recovery 'unlikely to solve independent Scotland's fiscal challenges'

High oil and gas revenues in the North Sea will not solve the fiscal challenges facing a newly independent Scotland, an influential think-tank has said.

The Scottish Government’s GERS figures, published on Wednesday, showed a higher price of oil and gas helped to fuel a speedier return to a lower overall notional deficit in Scotland, but without them the deficit would have reduced at the same rate as the UK.

David Phillips, associate director at the Institute for Fiscal Studies, said Scotland’s “implicit budget deficit” could be close to the UK’s as a whole for the first time since before the 2014 independence referendum.

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However, a rosy picture for the oil and gas sector does not solve all of the problems that an independent Scotland would face, he said.

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Mr Phillips said: "If the much higher oil and gas revenues expected this year were sustained indefinitely in the future, an independent Scotland would likely still need to cut services or raise taxes in the years ahead to address the costs associated with an ageing population and rising healthcare spending.

"However, those service cuts or tax increases could be of a similar magnitude to those that the UK as a whole will likely need to make.

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“Rather than solve an independent Scotland’s fiscal challenges, higher oil and gas revenues would therefore give more time to address those challenges.”

Mr Phillips said the shortfall in Scottish revenues is driven by both income tax and business rates, which have grown at a slower rate than the UK as a whole, with an independent Scotland requiring a “closer alignment” between high spending and below-average onshore tax revenues.

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It has been said that a rosy picture for the oil and gas sector does not solve all of the problems that an independent Scotland would face.

North Sea revenue could, however, give more time to either raise taxes or cut spending, or enact reforms to increase the rate of economic growth.

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Mairi Spowage, director of the Fraser of Allander Institute, criticised the argument that onshore revenues cover the day-to-day devolution spending.

She said: “What this does not include is any capital investment, of course, including £8 billion of devolved capital expenditure.

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“More significantly, there are a number of reserved functions that are also funded outwith these two categories, including reserved economic development spending of £2.2bn (so on programmes like Innovate UK), public sector debt interest payments (£4.5bn), reserved transport spending (£988m), public and common services (£1.4bn, including running administrative services such as HMRC), defence (£3.9bn), international services (£659m, including foreign aid) etc.

“If the very purpose of independence is to take different choices about the type of economy and society that we live in, then it is possible that these a set of accounts based upon the world today could look different, over the long term, in an independent Scotland.”

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Ms Spowage added: “GERS does provide an accurate picture of where Scotland is in 2022.

"In doing so it sets the starting point for a discussion about the immediate choices, opportunities and challenges that need to be addressed by those advocating new fiscal arrangements.

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"And here the challenge is stark, with a likely deficit far in excess of the UK as a whole, other comparable countries or that which is deemed to be sustainable in the long term.It is not enough to say ‘everything will be fine’ or ‘look at this country, they can run a sensible fiscal balance so why can’t Scotland?’.”

The fifth episode of the brand new limited series podcast, How to be an independent country: Scotland’s Choices, is out now.

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It is available wherever you get your podcasts, including Apple Podcasts and Spotify.

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