An inconvenient truth
Spin machine can’t hide the fact oil could never save Scotland from budget meltdown
THE pro-independence spin machine has been in overdrive trying to prevent people understanding what the Scottish Government GERS figures show us.
The SNP’s own independence White Paper clearly stated that GERS “provides a useful indication of the relative strength of Scotland’s public finances as part of the UK and a starting point for discussions of Scotland’s fiscal position following independence”.
So let’s cut through the spin and discuss what this starting point now tells us.
The latest GERS figures show Scotland’s deficit is £1900 a person higher than the rest of the UK. This is the Deficit Gap – the amount effectively transferred to Scotland through UK-wide pooling and sharing – and it’s more than £10billion a year.
The graph on this page explains how that Deficit Gap arises. The green line shows Scotland’s onshore economy consistently generates about £350 a person less tax income than the rest of the UK.
The black line shows what happens when you add on Scotland’s North Sea oil revenues.
When the black line has been above the axis, Scotland has generated relatively higher tax than the rest of the UK – that has only ever been because of North Sea oil.
With oil revenues now close to zero, Scotland would be reliant on its lower-than-UK-average onshore revenues to fund public spending.
The rest of the deficit gap is explained by Scotland’s now over £1500 a person higher spending, shown by the red line.
The fiscal framework (underpinned by the Barnett Formula) ensures Scotland can maintain higher spending levels despite the loss of oil revenues. That’s what pooling and sharing means, that’s the safety net we would have lost had we voted Yes in 2014.
When the black line is higher than the red line, GERS figures demonstrate Scotland having stronger public sector finances than the rest of the UK. That’s only been materially true once in the last 17 years, when oil peaked in 2008-09.
That’s why the SNP’s independence White Paper assumed North Sea revenues of £6.8 to £7.9billion a year – it was the only way they could make their economic case add up.
Many of us observed at the time that those forecasts were recklessly optimistic. Now the figure turns out to be close to zero, we’ve been proven right.
So how do the SNP deal with this inconvenient truth?
They hint that we can’t trust the data because estimates are involved – neglecting to mention that these qualify as National Statistics and that the main differences they highlight relate to spending, where actual figures, not estimates, are used.
They talk in unquantified terms about “different spending choices”, nearly always using Trident as their example – neglecting to mention that our share of Trident costs account for maybe £200million of our allocated defence spending.
In fact, the SNP’s notoriously optimistic independence White Paper could only find net savings of £600million through “different spending choices”.
Their economic case relied on nearly £8billion of oil revenues and they have yet to offer a credible answer as to how an independent Scotland would manage now those oil revenues have gone and the Deficit Gap is in fact now over £10billion.
So in what looks like a desperate move, last weekend’s pro-independence press blamed “Westminster mismanagement” for the decline in our oil tax revenues.
The support offered for this was a report from the pro-independence Business for Scotland. The report did little more than observe that Norway has generated lots of tax from oil in the last few years and suggest that it would therefore “not be unreasonable to add Norway’s £11billion revenues” to Scotland’s fiscal balance.
To be clear: revenues are generated by taxing profits. While it’s true the Norwegian and UK industries are exposed to the same oil market prices, our costs of production are higher, volumes are lower and we’re incurring greater decommissioning costs.
The UK offshore industry simply doesn’t make the profits Norway’s does – and without profit there is no tax.
The Business for Scotland report even argues – incredibly – that Westminster has not taxed the oil industry heavily enough since the oil price crash in 2015.
But remember, back in 2015, the SNP’s then finance minister John Swinney called for tax cuts for the industry. The SNP’s 2017 election manifesto then proclaimed “only after pressure from SNP MPs did the Tory Chancellor abolish the petroleum revenue tax and halve the supplementary charge to 10 per cent”.
Quite how protecting Scottish jobs by reducing the tax burden on the oil industry – as called for and celebrated by the SNP – is “mismanagement” is anybody’s guess.
The decline in profitability of our oil industry has been so dramatic that even if tax rates hadn’t been cut, the revenue generated would have dwindled to close to zero anyway.
When their cheer-leaders in the press promote a misleading think tank making transparently ludicrous arguments, you know the SNP’s economic strategy is in tatters.