The impact of low oil revenues according to John Swinney

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…

For more on the duplicity of the SNP’s forecasts, please read this

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”?

 

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NOTES –

* 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.

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6 thoughts on “The impact of low oil revenues according to John Swinney

  1. Given that the UK government has been running a deficit for the vast majority of the last 30 years, I think it is fair to assume that the >£300billion in production tax alone has been ‘a key source of tax receipts’ to the UK… http://oilandgasuk.co.uk/knowledgecentre/economic-contribution.cfm

    I too work in the industry, and I find your lack of critique on the UK somewhat odd. The oil revenues haven’t been invested over the last few decades and we look particularly vulnerable just now during the downturn. Scotland has far more going for it than most countries in terms of natural resource, and the beauty of our landscape and cities generate a wealth of industry on their own – but to keep moving forward we will need to evolve. Has the infrastructure investment in Scotland been sufficient? This is something that should have been happening with far more gusto than we have seen over the last few decades…

    My own view (as you may have guessed) is that we missed a big opportunity last year by failing to vote Yes… everything that has happened since the referendum (including the Oil & Gas downturn) has only increased that feeling for me.

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    1. Hi Stuart, thanks for the comment.

      The UK nearly always runs a deficit, not just over the last 30 years, and I’d agree with you completely that during the 80s the oil revenues were a key source of tax for the UK government. They helped to meet the welfare burden of the mine closures etc in England and the central belt amongst other things.

      I also agree that Scotland has a lot going for it although I’m not sure I agree that it’s “far more than most countries” and we should also be aware of the difficulties that Scotland faces from things like an older demographic and geographic difficulties – i.e. things which make public services more expensive. But none of these things are insurmountable, I’m just arguing that they should be acknowledged and faced honestly.

      Obviously I’m going to disagree with you on the final paragraph. Having been within the union during the oil boom years and shared the substantial fiscal reward of North Sea revenues, it seems utterly mad to me for us now to turn our back when we seek to share the fiscal risk and “cash in our deposit”, so to speak. This is exactly what the union is for, economically speaking.

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  2. Thanks for the reply Fraser. I think it is interesting to look at a couple of aspects within it – the oil wealth was used to finance the unemployment benefits for the sharp decline of mining & then there’s the idea that the UK is founded on wealth redistribution. I live in Motherwell, one the many areas of the UK that has suffered from mass unemployment. Rather than feeling like I live an area that has benefited from wealth redistribution – the realities of our social inequalities are more than a set of stats (and the stats aren’t good: http://www.theguardian.com/society/2015/apr/30/life-expectancy-increases-gap-widens-rich-poor-imperial-research). I’d be interested to know how you see our ‘deposit’ being returned? Replacing highly paid jobs with unemployment benefits can’t be considered as a suitable strategy, and the impacts of this are already being seen as a result of the current downturn: http://www.heraldscotland.com/business/14157238.Oil_industry_decline_is_main_cause_of_falling_Scottish_retail_sales__experts_say/?ref=eb

    There has to be a clear strategy to invest in our future economy… when looking across the developed world, it seems that countries of equivalent size to Scotland are fairing better to large overly centralised economies like the UK. The Libs Dems used to seem like a party who were in favour of radical reform to address that. Hopefully those days will return sooner rather than later…

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    1. Valid points and I’d agree that the UK is overly-centralised, in fact Scotland is that way too under the SNP and we need to see much more decentralisation of power.

      But do you need independence for that? The UK has been moving, albeit slowly, to a devolved / federalish system for a while now with increasing amount of decentralisation that will only continue as more and more pressure is put on central government by devolved assemblies and local authorities.

      Denmark is an interesting example – they charge about 10% more of their GDP in tax, have various privatised services like the fire brigade and have a pegged currency which causes them a few issues. But if that’s a model which would be offered post-independence then someone should present that. Cost it, detail it and let us decide on a blueprint.

      But that’s not what happened during indyref. We were offered an entirely unrealistic, to the point of farcical, vision of independence where nothing would really change except we’d be magically better off and everyone could get the future they wanted – be that green activists who wanted to maximise our renewable potential or the lunatic fringe who wanted to exploit mythical secret oil fields beneath Clair Ridge and in the Clyde.

      It was the same for suggestions that we could build a “better society” or develop a “strategy to benefit Scotland”. Both nice phrases which no-one could disagree with but the problem is not *what* but *how*. There were never any details, just nice turns of phrase and some rhetoric and if you tried to press the issue you were accused of claiming Scotland was somehow incapable of it, of talking Scotland down.

      When I sat down and thought about it, I didn’t see what it was that the Yes campaign thought we could do under independence that we couldn’t / can’t do under devolution. Empty talk of “levers” didn’t do it for me and certainly wasn’t going to be worth the undoubted fiscal disadvantages that would have resulted from a Yes vote.

      Of course, that’s just a personal opinion but I think it was taken from an appreciation of the facts at hand and I have absolutely no argument with anyone who honestly looks at the same set of facts and reaches the opposite conclusion – that’s their prerogative. It’s those who seek to mislead using misleading campaign rhetoric like “oil is just a bonus” when even they know that it’s not true which really irk me, hence the point of this blog I guess.

      Sorry, that turned into a bit of an essay! 😀

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      1. No worries about the essay style responses… 🙂

        I certainly think that the case for the Yes vote could have been better made, and it was partly down to my own frustration on the missing elements that I started writing too (my final post-indyref blog here: https://darlingblogs.wordpress.com/2014/09/14/why-im-voting-yes/ – and there’s a link in there that covers some of my own ideas about Oil & Gas moving forward…). Ultimately though I think the debate that was had, and which continues to rumble on, has been very healthy for our democracy and in the long run I’m sure we’ll be better for it…

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