The full extent of the impact of plunging oil prices on Scotland’s finances has been laid bare in a report by the Institute for Fiscal Studies showing that a post-independence government in Edinburgh would now be facing the need to raise tax or cut spending to fill a £10bn-plus black hole.
The IFS said the drop in the cost of crude from a peak of $115 a barrel in the months leading up to the 2014 referendum meant that while the UK as a whole would be back in surplus by the end of the decade, Scotland’s budget deficit would remain at more than 6% of national income.
A yes vote in the referendum in September 2014 would have meant Scotland becoming an independent country on Thursday, but the thinktank said the forecasts for expected North Sea revenues made by the Scottish government ahead of the referendum were “increasingly further away from what is now expected”.
It said the deterioration in Scotland’s finances over the past 18 months amounted to £10.6bn or about £2,000 per head.
David Phillips, an IFS researcher, said estimates for the UK budget deficit were slightly higher over the next couple of years but smaller in both 2019-20 and 2020-21 as a result of tax increases and a continuation of austerity.
“However in the case of Scotland, our projections are for a larger budget deficit in each and every year. For instance, our latest projections imply a budget deficit of around 9.4% of national income in the coming financial year, 2016-17, compared to 6.8% in our previous projections.”
The IFS research showed that oil and gas revenues had been hit by a double blow of falling prices and a more generous tax regime for producers. Receipts were expected to be negative by £0.8bn a year on average in the four years from 2015-16 compared to +£0.7bn a year in forecasts made in 2015.
It said: “Given that the majority of these revenues would have come from operations in Scottish waters, the impact of these further declines on the Scottish deficit is proportionately much larger than that on the deficit of the UK as a whole.”
The IFS said declines in oil and gas prices, profits and investment meant Scotland’s economy had grown less quickly than previously projected. “This means that a given cash deficit represents a larger share of the, now smaller, economy.”
In the 2016-17 financial year, the IFS said it expected Scotland’s deficit to be 9.4% against 2.9% for the UK as a whole. The “fiscal gap” of 6.5% is more than double the 3% in 2013-14, when the North Sea sector was booming on the back of high oil and gas prices.
It said Scotland was largely insulated from the impact of falling oil revenues because it was part of the UK. “Figures on the Scottish deficit would be much more important if it became fully responsible for managing its own public finances. That is if it were to be fully fiscally autonomous or an independent state.”
Phillips said it was possible an independent Scotland might have been able to strike a good deal on its share of the UK national debt, which would have led to lower interest payments and a smaller budget deficit. But even had Scotland inherited none of the UK’s debt its budget shortfall would still be 7.6% of GDP in 2016-17.
The IFS study said independence would probably have had a detrimental short-term impact on the Scottish economy, leading to a higher deficit, adding: “But if, as the Scottish government has previously claimed, independence would allow policies to grow the Scottish economy more quickly, such faster growth would tend to push up revenues and reduce Scotland’s deficit.
“Independence would also, in principle, give the Scottish government more freedom to tax and spend more or less, which could have implications for the Scottish budget deficit. In practice, however, if an independent Scotland faced a budget deficit anything like that in our projections, spending cuts or tax rises would be needed to put the public finances on a firmer footing.”
The IFS said the precise numbers would have differed after a yes vote but concluded that the impact of the fall in oil prices “clearly would have made it more difficult for an independent Scotland to manage its public finances.”
This article was written by Larry Elliott Economics editor, for theguardian.com on Wednesday 23rd March 2016 18.00 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010