With the SNP’s delayed budget to be announced tomorrow, John Swinney has been getting the excuses in nice and early. As reported by the BBC over the weekend, Mr Swinney warns of “tough choices ahead” for Scotland, laying the blame for this firmly at the door of the Westminster government.
The rhetoric is the same as it ever was… “UK austerity”… “imposed on Scotland”… the inference that an independent Scotland wouldn’t be subjected to such cuts.
The UK Government has countered with their own rhetoric – Scotland now has the power to raise additional tax if it wants to reverse these cuts and “look at the oil price – aren’t you glad you aren’t independent”. Many on the pro-independence side will deride the former, claim that the new tax-raising powers are “a political trap” or insufficient, that the real “levers” they require just happen to be the ones that haven’t been devolved but there’s little denying the impact of the latter.
Since July 2014, a barrel of Brent Crude has fallen from $115 to just $39 and looks set to fall further**. North Sea tax revenues have collapsed by 94% to just £130m in 2014/15 – compared to the $4700m oil revenues for 2013/14, £4000m of that being attributed to Scotland as our geographical share.
You can’t deny that is going to be a problem, can you? Everyone would look at a near £4bn drop in public revenues and consider it to be problematic, right?
Well not quite everyone. Having prepared the ground with the well-worn myth that “oil is just a bonus”, SNP politicians and their online supporters have been regurgitating the same-old lines: onshore wealth per head in Scotland is similar to the UK without oil… for each of the last 34 years output in Scotland (with oil) has been higher… Standard & Poor said we’d qualify for their “highest economic assessment”… and so on and so forth.
Of course everyone is aware that Scotland’s expenditure is so much higher than the rest of the UK (usually quoted at around £1200 additional spending per head) and having a “similar” revenue is therefore going to leave a larger deficit than countries where spending is lower. Which is why the loss of those oil revenues, for so long filling or even exceeding that gap, would be such a problem for an independent or fiscally autonomous Scotland.
The SNP are understandably hesitant to admit to this, at least in public. Some of you, though, may remember that in March 2013 an “explosive” memo written by John Swinney was leaked to the press. This memo contained some internal Scottish Government discussions on the financial realities and opportunities of independence as well as, most interestingly for us, some detail on what oil and gas revenues would mean to an independent Scotland.
Rather than quote from a source that SNP supporters could write off as “unionist bias” (it’s a long list), I thought I’d see what John Swinney, the SNP Finance Minister, had to say about the impact of lost oil revenues. Surely nationalists can’t simply write this off as unionist spin?
Here then are a random selection of quotes from Swinney’s memo.
North Sea tax revenues are a key source of tax receipts in Scotland
“…a key source…” but haven’t we been told for years that they are “just a bonus”. Odd that the language is so markedly different for internal communication. Of course Mr Swinney is right, they are a key source of tax receipts for Scotland.
And including that “key source of tax receipts”, there is a forecast of our future fiscal position:
Including a geographical share of North Sea revenues, both Scotland and the UK are expected to run a net fiscal deficit in each of the year to 2016-17. Before 2016-17, Scotland is projected to have a similar deficit, as a share of GDP, than the UK. However, in 2016-17, OBR forecasts suggest that Scotland would have a marginally larger net fiscal deficit than the UK.
This, of course, is using OBR forecasts and will assume the constitutional status quo and so reflects the status of Scotland’s finances within the union. Had there been a Yes vote in September 2014 then, of course, the impact of any changes implemented from the nominal “independence day” of March 16th 2016 would have to have been taken into account.
The key message is that a larger net fiscal deficit imposes a greater burden of borrowing, tax hikes and/or spending cuts for a country of 5 million than it does when spreading the load with a country of 60 million that is performing slightly better at that time.
What is worth noting, too, is that this “marginally larger net fiscal deficit” includes a geographical share of North Sea revenues. It might be worth looking into how much that was expected to be…
The forecast change in Scotland’s fiscal position relative to the UK over the period to 2016-17 reflects the fact that the OBR expect North Sea receipts, which account for a larger share of total tax revenue in Scotland than in the UK, to fall in cash terms by 50% between 2011-12 and 2016-17. There is however a high degree of uncertainty around future North Sea revenues, reflecting considerable volatility in production and oil prices
For info, the geographical North Sea revenues attributed to Scotland for 2011-12 were £10.6bn. A 50% drop in cash terms by 2016-17 implies that the revenues for that year were expected to be £5.3bn. You might then wonder why the SNP’s White Paper suggested that it anticipated revenues of £6.7bn – £7.9bn for the same year…
Given the relative importance of North Sea revenues to Scotland’s public finances, these downward revisions have resulted in a deterioration in the outlook for Scotland’s public finances. Scotland’s forecast cumulative net fiscal deficit between 2011-12 and 2015-16 has more than doubled from £12bn to £28bn as a result of the revisions to North Sea revenue over the past 12 months. This high level of volatility creates considerable uncertainty in projecting forward Scotland’s fiscal position
Again, let’s remember that the SNP tell us that oil is “only a bonus”. Yet revisions to the value of its revenue have more than doubled the deficit forecasts, not to mention the residual considerable uncertainty in forecasting.
Of course, the SNP had plans for that:
In an independent Scotland this will have important implications for budget setting and estimating public sector borrowing requirements. Careful consideration will need to be given to managing this revenue source while ensuring effective and competent oversight of public finances over time. One approach is to reduce dependence on oil revenues to support annual expenditure budgets, bu using oil revenues to accumulate an oil fund
Well that seems sensible. Oh, hang on…
However this would, on present assumptions about onshore tax revenues, require some downward revision in current spending
So with a forecast of more than £5300m oil revenues, the SNP were already admitting that in order to create an oil fund they would need to cut spending. What do you think would have been needed with just £117m of revenue? (£117m assuming ~90% geographical share of £130m UKCS revenue)
Not only would an oil fund have been impossible but we’d be looking at very significant public spending cuts, or “austerity-max” if you like.
This should not come as a surprise to anyone. If you lose a revenue stream which you anticipate is going to provide £1 of every 8 your government accrues then there’s going to be trouble.
So tomorrow, when Swinney is busy spinning that “Scotland remains the largest oil producer in the EU” (neatly excluding non-EU Norway there) and that “even without oil, Scotland has the third highest income per head of the 12 countries and regions of the UK”, we should remember that he’s also said that North Sea revenues are a “key source of tax receipts for Scotland” which “account for a larger share of total tax revenue in Scotland than in the UK” and whose volatility would have “important implications for budget setting and estimating public sector borrowing requirements”.
So the question remains, why are they still busy telling us that it’s “just a bonus”?
* you can find the full leaked memo here which contains all the quotes above – apologies for the sensationalist first page, it wouldn’t have been my choice.
** two notes to counter the usual tiresome comebacks on this point. First, it is true that (mostly) no-one predicted the oil price crash but it is not true that the SNP’s projections were the same as the UK Government’s (see here for details).
Second, I am not pleased to report the oil price crash. One of the more deplorable accusations from nats is that somehow “unionists” are extracting some form of glee from the oil price crash. I work in the industry, my job is at risk and with it my family’s well-being so you’ll forgive me if I treat these accusations with the contempt they are due.