Scotland under either independence or Full Fiscal Autonomy would be dangerously reliant on oil and gas revenues, argues GREG WILLIAMS

 

Full Fiscal Autonomy (FFA) is gaining some traction in the Scottish Labour party. But are people backing it because it’s the right thing fiscally for Scotland, or because it provides us with a convenient niche between separation on the one hand and siding with the Tories and Lib Dems on the other? With the aid of a novel concept called data, we can try and get to the bottom of what FFA or separation means for Scotland economically. You may not be surprised that a fiscally independent Scotland, whether under the Saltire or the Union Jack, would be placing a hefty bet on black. Black gold.

Earlier this year, the SNP used the latest Government Expenditure and Revenue in Scotland (GERS) figures to argue that an independent Scotland could balance its own books. Much was made of the fact that, by incorporating a geographic share of North Sea Oil and Gas (O&G) revenue, Scotland had a net budget deficit of 10.6 per cent of GDP, comparing favourably with a deficit of 11.1% across the UK as a whole. [1] Without that share of revenue, the budget deficit would be an eye watering 18% – even the SNP would agree that is unsustainable, and FFA would be a non-starter under that basis. So let’s assume for the sake of this article that the GERS figures are comprehensive [2] and that an independent Scotland would gain a geographic share of North Sea revenue. What would a fiscally autonomous Scotland look like?

The North Sea generated £6.5bn of tax revenue in the financial year 2009-10. Approximately 83% of this is located in parts of the North Sea closer to Scotland than the rest of the UK [3]. As the graph below shows, this geographic share of this contributed 13% of Scotland’s government revenue, compared with all North Sea revenue accounting for 1% of the UK’s revenue.

Source data: Government Expenditure and Revenue Scotland 2011. http://scotland.gov.uk/Topics/Statistics/Browse/Economy/GERS

The key point is that even with a geographic share of North Sea oil revenues, a fiscally autonomous Scotland can only reach a position of budget deficit parity with the rest of the UK. To reach that position of parity, Scotland is reliant on North Sea oil revenues to balance the books – ten times more than the UK as a whole. GERS shows this dependency is not unique to the tax year 2009-10:


This is the grand irony – an independent Scotland, a green and prosperous Scotland – would have an economy more dependent on hydrocarbons than it does being part of the UK as a whole. As a party we must ask ourselves whether it is wise to take Scotland to a place where its books are balanced on O&G taxation.  Hydrocarbons are a volatile commodity and consequently an unstable revenue source. Recent years have been a comparative boom period, when looking at the historical oil price adjusted for inflation:

North Sea revenue figures from GERS table 5.1. Oil price per barrel adjusted for inflation. Source:
http://inflationdata.com/inflation/inflation_rate/Historical_Oil_Prices_Table.asp 

The SNP may dismiss this analysis as outmoded and negative. They will rightly point out that, in spite of the volatility of revenue, over the last five years Scotland (with a geographic share of North Sea revenues) and the UK as a whole are in relatively similar position in terms of budget deficit as a % of GDP. Both figures were around 2-3% before the recession.[4] However the picture for an independent Scotland gets worse once the forecast production output for the North Sea is brought into the equation:

Reproduced from Prof A. Kemp, ‘The Short and Long Term Prospects for Activity in the UK Continental Shelf: the 2011 Perspective’

Even with favourable economic conditions, production will continue to decline – halving over the next twenty years.

So there are some big questions for advocates of FFA as well as separation to answer. Referring back to the graph of taxation breakdown, when O&G revenues drop as forecast, the only significant revenue levers left are income tax, National Insurance and VAT. Which one would a fiscally autonomous or independent Scotland put up to keep the nation solvent? Fortunately for Scottish Labour, the SNP are in a worse political position on balancing the books. They have already banked oil and gas revenues to cut fuel prices,[5] cut corporation tax[6] and also to create an Oil Fund.[7]

Regardless of the SNP’s romantic enthusiasm, we have a duty to make sure we are advocating a sound fiscal position for Scotland, not the most convenient political position for our party. The figures suggest a fiscally autonomous Scotland would be dangerously reliant on O&G revenues. So is this the right direction to take Scottish Labour policy?

My own thoughts, for what they’re worth, are that we should not rule FFA out. On a purely comparative basis, it’s more than uncomfortable to argue that Scotland should not have at least the same sort of fiscal powers as a US state or one of the regions of Germany. Our credibility in the debate gets even harder when the ability to delivery Labour priorities like social justice is patently constrained by a Tory economic straight jacket. We should cast the net further afield and look at how fiscal autonomy works elsewhere in the world – not confining ourselves to the parameters of debate the SNP have set for us. Then we can decide whether the powers within the Scotland bill sufficiently enable Scotland to chart its own path within the Union and Labour to deliver its social priorities. Ultimately, if we decide as a party to argue for more than what the Scotland Bill will deliver, we must ensure that our plans to not leave Scotland excessively dependent on black gold. We are a responsible party and, unlike the SNP, we would not march Scotland of an economic cliff for our own self interest.

Greg Williams was Scottish Labour’s candidate in Aberdeen South and North Kincardine in May and works in procurement for an oil exploration company. He tweets as @greggerswilliam.


[2] It should be acknowledged that GERS figures do not apportion a share of UK government debt.

[4] Note – GERS did not calculate net fiscal balance as a percentage of GDP including a geographic share of oil and gas revenue until the SNP came to power.