Wednesday, 24 August 2016

Fraser of Allander Institute "Independence is impossible to operate with this level of deficit"

Scotland’s share of North Sea oil tax revenues slumped steeply from £1.8bn to £60m last year. 

The Fraser of Allander Institute, an economics think tank at Strathclyde University, directly challenged Sturgeon’s statement on Wednesday that “the root to closing the deficit is fundamentally on the revenue growth side”.

Closing a 21% structural deficit would need rates of economic growth for Scotland not seen in current lifetimes, the FAI said. As Sturgeon had pointed out on Tuesday, the Brexit vote was likely to make those efforts even more difficult.

 “It is simply not possible to operate under independence with a deficit at this scale – full stop ” the FAI said. “The Scottish government needs to set out the tough choices that it would make alongside a detailed and comprehensive plan for how it would manage the public finances under independence. This won’t be easy, but is essential.”
The data put Scotland’s net fiscal deficit last year at £14.8bn, including North Sea receipts, £522m higher than the previous year. That was equivalent to 9.5% of Scotland’s GDP. The UK’s estimated deficit for the same period was 4% of GDP.

Asked how an independent Scotland could meet the EU’s requirements for an annual spending deficit to be lower than 3%, Sturgeon said independence would change Scotland’s overall financial position. “I accept Scotland faces, whatever our constitutional arrangements, a very challenging fiscal position, [but] the fundamentals of our economy are strong,” she said.

Scotland’s tax revenues were estimated at £53.7bn, but the Scottish and UK governments spent £68.6bn on public services in Scotland, and on Scotland’s share of UK and overseas spending.

Kezia Dugdale, the Scottish Labour leader, said the figures “should act as a reality check for those calling for another independence referendum”.

“During the independence referendum, Nicola Sturgeon personally promised a second oil boom. Her own government’s figures show she misled people and that is unforgivable,” she said.

The SNP’s own figures confirm independence would mean severe cuts over and above those already being imposed by the Tories, at exactly the time when our public services need more investment.”

David Mundell, the Scottish secretary, said: “Scotland weathered a dramatic slump in oil revenues last year because we are part of a United Kingdom that has at its heart a system for pooling and sharing resources across the country as a whole.

The fact public spending was £1,200 per head higher in Scotland than the UK as a whole also demonstrates that the United Kingdom, not the European Union, is the vital union for Scotland’s prosperity.”

Sturgeon denied that this meant the country was being subsidised by the rest of the UK, saying Scotland had paid in a higher rate of tax revenues than the UK on average in recent decades.

That position ignores the far higher levels of public spending in Scotland, which needed in effect an injection of £15bn last year from the UK treasury.

Sturgeon denied that closing the gap would require spending cuts or tax rises. “What I say is growing revenue is the priority. Public spending in Scotland is higher than the rest of the UK for some very good and in many respects unavoidable reasons, such as its rurality. It costs more to deliver health services to island communities,” she said.

Sturgeon insisted that the data offered cause for some optimism. It showed that taxes from the onshore economy, excluding North Sea revenues, had grown by £1.9bn. At 36.5% of Scotland’s GDP, this was the best figure since the financial crisis and more than offset the £1.7bn lost from the decline in oil and gas taxes.

But she said the overall figures underlined her anxieties about the damage that leaving the EU could do to the Scottish economy. “Leaving the EU will leave the task of growing the onshore economy so much harder than it might be,” Sturgeon said.

Prof John McLaren, an independent economist at Scottish Trends, said future oil revenues were never likely to recover enough to significantly cut the deficit. A doubling of current oil prices to $100 a barrel would still only raise oil receipts to £2.8bn.

McLaren said Scotland’s worse position compared with the UK was likely to continue for the next five years, the direct reverse of claims made in Alex Salmond’s white paper on independence in 2013 that Scotland’s tax revenues and finances would remain stronger than the UK’s.

“Scotland’s fiscal position relative to the UK can be forecast with greater certainty and is likely to remain at around the current level – about 5.5% of GDP worse off than the UK’s,” McLaren predicted.

David Mundell, the Scottish secretary, said: “Scotland weathered a dramatic slump in oil revenues last year because we are part of a United Kingdom that has at its heart a system for pooling and sharing resources across the country as a whole.

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