Nicola Sturgeon’s devo-max ‘would lose Scots £5bn’

Nicola Sturgeon has said one of her priorities as SNP leader will be to push for a radical package of devolved powers, including full fiscal autonomy, through the all-party Smith Commission which convenes for the first time today.

However, a report published on the eve of the inaugural meeting, by the think-tank Fiscal Affairs Scotland (FAS), claimed that Scotland could face a budget deficit of up to £5bn if full fiscal autonomy was devolved to Holyrood.

The report said that an increased reliance on declining oil revenues could lead to a significant funding shortfall if Scotland moved away from the current Barnett Formula system, and it urged Lord Smith of Kelvin, who is chairing the commission, to take into account the potential impact on Scotland’s public finances.

The SNP’s negotiating team, led by finance secretary John Swinney, has already made its submission to the commission with a plan for full fiscal autonomy – where all taxes are either controlled by, or assigned to, the Scottish Government.

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The Nationalists also want to take over responsibility for welfare, as part of a “devo-max” plan that would see Holyrood controlling all areas of tax and expenditure, leaving just defence and foreign affairs reserved to Westminster. But Scotland would face cuts to public spending if the existing block grant arrangement, which has led to public spending per head being typically 20 per cent higher north of the Border than in England, was switched to a new settlement that saw Holyrood wholly responsible for raising taxes to fund public services, the FAS said.

The think-tank said levels of funding for public services could hinge on what future funding mechanism is agreed by the commission, which has already received submissions from the five main parties at Holyrood ahead of today’s historic talks in Edinburgh. The FAS report said the UK’s North Sea oil and gas revenues of £1.1bn for the first half of 2014-15 – £1 million less than in the previous year – would not be enough to make up for the Barnett funding that would be lost in the event of full financial powers being devolved.

The “negative differential” between what Scotland currently receives and what will be available under full fiscal autonomy would be worth almost £5bn, based on estimates from the Office for Budget Responsibility, the authors of the report said.

John McLaren, an economist for FAS and joint author of the report, said the SNP’s pitch to the Smith Commission for full fiscal autonomy would put Scotland’s public services at risk.

He said: “The latest oil revenue data brings into focus Scotland’s future fiscal position under different funding scenarios. In particular, the Smith Commission needs to take into account the potential impact of continuing relatively low levels of North Sea revenues on Scotland’s budget, if North Sea revenues are to be part of any negotiated package.

“Our calculations suggest that, across a wide range of assumptions, full fiscal autonomy could lead to a significant shortfall in funding over what the current system delivers.”

Lord Smith’s commission was launched after Scotland voted against independence in last month’s referendum and is tasked with delivering the Unionist parties’ pledge of enhanced devolution. Two representatives from each of the parties with MSPs at Holyrood will take part in the cross-party talks. The Smith Commission is set to agree a way forward by the end of November, before the UK government publishes draft legislative proposals in January 2015.

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Last night, the Scottish Government did not try to rebut the think-tank’s calculations. A spokesperson said: “Scotland has generated more tax per head than the UK as a whole in each of the last 33 years. Even when North Sea revenue is excluded, on a per capita basis, Scotland’s national income and tax revenues are on a par with the UK. It should also be noted that even with the current Barnett Formula, Scotland will continue to face cuts to its budget of 10 per cent over the five years to 2015/16.

“Responsibility for oil and gas taxation would provide Scotland with the opportunity to exercise responsible stewardship of the North Sea resources and maximise its benefits, in contrast to the short-term approach to oil and gas taxation that has been adopted by the UK Government.

“With greater responsibility, the Scottish Government would also be able to establish an oil stability and savings fund which could be used to enhance budgetary planning and manage revenues over the long term.”

But opposition parties said the FAS findings were a fresh blow to the SNP following its defeat in the independence referendum.

Scottish Labour’s deputy finance spokeswoman Jenny Marra suggested the SNP was attempting to use the Smith Commission to promote exaggerated claims about Scotland’s oil wealth made in its independence white paper.

Ms Marra said: “These figures released by Fiscal Affairs Scotland blow yet another hole in the SNP’s economic reputation and confirm that the SNP’s white paper was based on fantasy economics.

“Their entire independence argument was based on oil prices of over $110. Oil prices have now fallen below $85, showing just how fanciful the white paper’s sums were.

“The SNP’s proposals to the Smith Commission would simply expose Scotland’s finances to falling oil revenues and unmanageable fiscal shocks, exactly as independence would have.

“The people of Scotland will not accept a party walking into the commission arguing for powers for powers’ sake, especially when it will result in Scotland being £5bn worse off. That is the harsh reality of the SNP’s current plans.”

Conservative plans to extend devolution would see Holyrood become responsible for setting the rates and bands of personal income tax as well as a share of VAT, while the Liberal Democrats’ submission to the Smith Commission states that Scotland should raise most of the money it spends.

ANALYSIS

John McLaren: Lower black gold tax take tarnishes fiscal autonomy

Data for oil and gas-related tax revenues from the North Sea are now available for the first half of 2014-15, and it doesn’t make for pretty reading.

At just over £1 billion, these taxes are raising only about half the level they did over the same period last year.

Furthermore, for most of this period the oil price was still above $100, and even in September it remained over $95, whereas since then it has fallen to well below $90.

This makes even the Office for Budget Responsibility’s (OBR) “cautious” forecast of £3.7 billion of North Sea tax revenues for the full financial year seem rather optimistic, while the Scottish Government’s top estimate of more than £6bn seems well out of reach, even if prices recover.

With the referendum over and after a majority voting No, you might think that this disappointing result is of less consequence now for Scotland.

However, that may not be the case. With the Smith Commission due to meet political parties for the first time today, the option of full fiscal autonomy (whereby Scotland either controls or is assigned all taxes) remains a possibility.

What do the low oil revenue figures imply for such a position?

Calculations by Fiscal Affairs Scotland, using both the OBR’s and the Scottish Government’s full range of forecasts for North Sea revenues, suggest that Scotland could lose out by as much as £5bn in the future if full fiscal autonomy applied.

This analysis makes clear the pivotal role that erratic North Sea tax revenues might play in Scotland’s finances, should they explicitly feature in a future Scottish funding settlement.

It also illustrates the difficulties and possible dangers of moving towards full fiscal autonomy when North Sea revenues are expected to remain below the “break-even” point, ie, where revenues raised fail to compensate for the higher per capita expenditure Scotland currently receives under the existing Barnett system.

Such a position highlights one of the crucial questions that the Smith Commission has to answer: how to increase autonomy and fiscal responsibility while at the same time retaining much of the risk-sharing currently available between Scotland and the rest of the UK? There is no theoretical “correct” answer to this question but the potential fiscal implications will need to be taken into account.

It will also be important to understand, and to be able to defend, the rationale for whatever the final outcome is.

As can be seen, this is tricky stuff to resolve and the very short timetable makes it even more difficult to come up with a negotiated, stable, settlement.

• John McLaren is an economist for Fiscal Affairs Scotland