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Scotland's oil tax reckoning

Douglas Fraser | 17:36 UK time, Tuesday, 26 April 2011

So Labour's decided it wants to talk about independence for the final stages of the Holyrood election campaign. And that brings back the old chestnut of how Scotland's finances would fare if it had full control of all taxation.

The unionist argument used to be that Scotland couldn't possibly survive on its own without running up enormous deficits.

Given the UK's fiscal incontinence over the past three years, the force of that attack has been somewhat blunted.

The next bit of the argument was that Scotland with oil revenue might have some good years, but the black stuff is too volatile a commodity price on which to base your economy, and output is inevitably going to decline.

The state of the oil and gas markets has certainly backed up the volatility argument. But the trends of international demand, allied to the prospect of peak oil as global supply goes into long-term decline, tend to look like volatility is to the upside. In short, the terms of this debate have changed a lot since the first Scottish Parliament election, and most of all since 2007.

We've got some updated figures, from those hard-working number-crunching folks at the Centre for Public Policy for Regions.
They've worked through the implications of the sharply raised oil price in recent months, and added in George Osborne's surprise £2bn Budget tax raid on oil production companies.

Taking assumptions used by the UK Treasury, and throwing in that extra £2bn per year, they allocate Scotland its geographic share of the £64bn in tax expected to flow from under UK waters over the next five years.

Politically explosive

Unsurprisingly, it doesn't look so bad when Scotland's projected deficit is set alongside the UK's fiscal overspend. This year, the two would be at their widest margin - the UK facing a deficit of 7.9% of GDP, while Scotland would face a 5% deficit.

That gap in Scotland's favour then closes in each of the next four years, to reach a UK deficit of 1.5% in 2015-16, while Scotland would have a 1.3% gap.

In cash terms, the help of £12bn in oil revenues this year would leave a Scottish Treasury with £7.7bn to find, compared with the UK's £135bn. By the end of the Osborne Squeeze in 2015-16, that would be down to a £2.5bn Scottish borrowing requirement, while the UK Treasury is on track for a £29bn spending gap that year.

Between 2005 and 2009, Scotland's estimated deficit as a percentage of GDP, when oil revenues are included, was smaller than the UK's in each of the four years. It was also within the 3% limit set (though now blown apart) as part of the eurozone's rules for prudent fiscal management.

That assumes that a fiscally autonomous Scotland would take a similar approach to cutting the deficit that George Osborne is taking. That's a bold assumption. The consensus seems to be that the major Holyrood parties, apart from Conservatives, would take any opportunity to slow up the cuts.

That also assumes that Scotland would implement the same tax raid that the Chancellor is mounting, as his way of avoiding the planned and politically-explosive 5p per litre increase in petrol duty. But as the hypotheticals grow, that also seems unlikely, as there is growing evidence that it will discourage vital investment in offshore production.

As the CPPR authors point out, the prospect of any kind of deficit, even the most manageable one, requires politicians to decide how it's handled; spending cuts, more borrowing or higher taxes?

Without that tax take, and if spending were at a higher level than currently planned, it's not possible to say that Scotland would be running a smaller deficit than the UK. But nor is it possible to say that it would be any more in the red than the UK.

You can hear a Newsnight Scotland special on the constitutional aspects of this year's campaign, tonight at 2300 BST on BBC 2 Scotland.

Update: On the subject of that Treasury tax raid, it's worth noting another strong attack from the industry, this time from Conoco-Phillips, third biggest oil major in the US. It points out it operates in 30 countries, and now counts the UK as "one of the more unstable investment climates for our business, and like others we are re-assessing future investments".

Chairman and chief executive Jim Mulva cites three major tax increases in the past ten years, raising tax on UK production from a minimum 30% to at least 62%, and this is now "a difficult place to invest".

That's a lot of warnings coming from North Sea operators. We should start to find out soon if the investment really is going to slow up.


  • Comment number 1.

    Brilliant timing for this article, Douglas.

    (Mods - The following quotes are all from Ed Balls speech today)

    Alas Ed Balls thinks that you are , "barmy" and "totally crackers".

    He thinks that "economically it is madness", and would be an "utter catastrophe".

  • Comment number 2.

    This reads more like desperation from the unionists rather than independent factual analysis.

  • Comment number 3.

    1. At 20:40pm 26th Apr 2011, reincarnation wrote:
    Alas Ed Balls thinks that you are , "barmy" and "totally crackers".
    He thinks that "economically it is madness", and would be an "utter catastrophe".

    I decode that as 'Labour can't get a majority without Scotland', i.e. an "utter catastrophe" for Labour.

  • Comment number 4.

    This is why we need a nationalist government. We want and deserve more of the oil revenue pie (our fair share even). The London government continue to direct its part into the pocket of bankers or just, in liquid form, up the wall. This resource will be gone soon enough.

  • Comment number 5.

    I am compelled to point out that even though I intend to vote SNP, I am not convinced about the case for independence. (IMO Countries need to be big enough to avoid being pushed around by the amoral pernicious corporations that dominate the world, or by the EU for that matter)


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