Analysis of Scotland’s past and future fiscal position in light of latest GERS (2014) report from the Scottish Government and latest Economic and Fiscal Outlook by the OBR.

By John Mclaren and Jo Armstrong

CPPR’s latest Briefing Note uses a variety of recently released UK and Scottish Government related documents to review Scotland’s future fiscal balance (ie, Scotland’s public sector revenues minus its expenditures) both in absolute terms as well as relative to the UK.

Scotland’s Fiscal Balance excluding Oil & Gas

Scotland’s onshore fiscal balance has been in deficit over the period 2008-09 to 2012-13, by between 13-17% of GDP. As such, Scotland has a noticeably higher fiscal deficit than the UK, by around an extra 5 % to 6 % of GDP.

Due in main to the fiscal austerity measures currently being proposed by the UK coalition Government, Scotland’s future onshore deficit is projected to decline but the gap, relative to the UK, is not.

Scotland’s Fiscal Balance including Oil & Gas

GERS continues to use the estimates for Scotland’s geographical share of these North Sea revenues made by Professors Kemp & Stephens (K&S) of Aberdeen University. CPPR has used both the K&S shares as well as those made by the UK HMRC, which are slightly lower.

Relative to the UK, Scotland’s position can be calculated (i) as a share (%) of output (GDP) and (ii) on a per head of population basis.

The latest GERS projections show that, using either measure, Scotland’s fiscal advantage over the UK achieved in 2011-12 disappears by 2012-13, as oil revenues fall by over 40%. Instead, a sizeable disadvantage emerges. Thereafter, using OBR forecasts from the UK’s Budget 2014, CPPR estimates that this relative UK advantage continues to grow.

We already know that total UK North Sea revenues, the main variable element in these calculations, are likely to have fallen again in 2013-14, to around £5 billion. This means that 2013-14 is more of an out-turn estimate than the sort of projection that is estimated for years beyond 2013-14.

Fiscal balance under various price and production scenarios

A year ago the Scottish Government outlined four additional North Sea revenue scenarios to those made by the OBR. These were based on varying oil prices and production levels, each of which results in higher North Sea tax revenue projections than those of the OBR. These forecasts are now out of date and the lower than expected out-turn North Sea tax revenue data for both 2012-13 and 2013-14 show them to be skewed in an optimistic manner.

It would need currently unforeseen improvements in North Sea production and/or the oil price before Scotland’s fiscal balance reverted to being better than the UK’s. This is primarily due to the considerable fall in North Sea production seen over the past four years.

Conclusions and recommended further work

From the latest OBR forecasts we can conclude that Scotland would be, relatively, significantly worse off than the UK over the period 2013-14 to 2018-19. In 2015-16, for example, Scotland’s relatively higher deficit would amount to almost £1000 per head. However, OBR make no forward assumptions over what might happen to the Barnett formula or to Scottish finances so it is not possible to be certain over whether the fiscal position under independence would be better or worse than that within the existing United Kingdom.

To help further the referendum debate, it is recommended that the Scottish Government  issues an updated version of its Oil and Gas Bulletin, given it is now over a year out of date. It would also be useful if the UK Government, or the OBR, or the Scottish Government estimated the impact of different price and production assumptions on future North Sea revenues. This would allow for a greater understanding of the volatility surrounding North Sea tax revenues and so the extent to which the OBR’s figures are a useful guide for future planning of the Scottish Budget.

Finally, we recommend that the Scottish and UK Governments publish a reconciliation of the HMRC and the K&S differences over Scotland’s share of North Sea tax revenues.

Quotes

John McLaren: “Based on the OBR’s latest forecasts, Scotland’s fiscal position, relative to the UK, continues to worsen. We now need the Scottish Government to update its own alternative, North Sea oil tax scenarios, based on the latest information available, in order to judge how these might affect Scotland’s future fiscal balance.”

Jo Armstrong: “As North Sea tax revenues are so critical to Scotland’s absolute and relative fiscal balance, it is important that both the Scottish and UK Governments supply greater certainty over Scotland’s share of these revenues and that more is understood about the implications of changes in costs, price and production levels.”