4 min read

Alex Salmond's sums on the impact of independence may be closer to reality than Danny Alexander's

Though the Scottish White Paper on independence has now been with us for more than 24 hours, confusion still reigns. How can Alex Salmond claim that following independence each Scot would be £600 better off, while Danny Alexander maintains that they would be £1,000 worse off?

Given some people will ultimately make their referendum choice based on which option will leave them better off, the difference is crucial – and yet few have tried to explain why they have such radically-different views.

So who is right? The answer is vitally important.

What we’re talking about here is the extent to which Scotland will be able to generate enough taxes to both fund its current spending and, maybe, to leave a little bit extra leftover.

Now, let’s get one thing out of the way first: the figures aren’t strictly comparable: Salmond’s £600 figure is for the first year of independence; Alexander’s £1,000, which is based on numbers from the Institute for Fiscal Studies, doesn’t kick in until 2021. However, what we can compare – to get a sense of why each side is claiming what they are – are their detailed numbers for 2016/17 (the potential year of independence).

Looking at these, it turns out that the White Paper and the IFS aren’t all that far off each other for most of their numbers. On spending they’re similar, and they’re not all that different on the total amount of normal non-oil related tax each thinks the country will generate come 2016/17. The White Paper envisages onshore tax receipts of £56.9bn; the IFS thinks they’ll be closer to £55.9bn – a billion pound’s difference, which comes partly from different assumptions about economic growth.

The main difference kicks in when you come to projected oil revenues.

The White Paper projects that Scotland will earn between £6.8bn and £7.9bn in North Sea-related taxes that year. The IFS thinks the revenues will be far smaller at £4.5bn.

How can two different organisations come up with such different answers? In part it’s because forecasting oil revenues is tricky: production in the North Sea is volatile, as are oil prices, both of which are key factors in determining how much the tax will raise. But it also transpires that the two camps have chosen projections which are in different parts of the spectrum.

The IFS’s projections are based on the Office for Budget Responsibility’s own forecasts for North Sea oil revenues, contained in its Budget forecasts. These suggest that North Sea oil tax revenues will drop from £6.2bn this year to just over £4bn by 2016/17. They are based on the assumption both that the volume of oil production will fall over that period, and that oil prices will also drop from over $110 a barrel to just over $90 a barrel.

OBRoilandgas
OBR forecasts for oil and gas. From the March Budget

The White Paper’s projections are based on two different forecasts from the Scottish Government’s Oil and Gas Analytical Bulletin. The low-ball estimate (£6.8bn in 2016/17) is based on the same declining production path used by the OBR, but with a more optimistic oil price assumption (scenario 2 below). The high-ball estimate (£7.9bn) is based on higher North Sea oil production, in line with forecasts from Oil and Gas UK, the group which represents UK oil producers (which is a business lobby, not a partisan political body) – scenario 4.

The Scottish Government’s Oil and Gas Analytical Bulletin forecasts for future oil revenues. The OBR forecasts are in the top row. The White Paper chose scenarios two and four
The Scottish Government’s Oil and Gas Analytical Bulletin forecasts for future oil revenues. The OBR forecasts are in the top row. The White Paper chose scenarios two and four

There is no definitive answer as to who is right, but it does appear as if in this case the OBR (and hence the IFS projections which are based on OBR numbers) is being more extreme than the White Paper. North Sea oil producers expect a noticeable increase in production in the next few years, something that simply isn’t factored into the OBR’s numbers. Indeed, it may well need to bump them up at the Autumn Statement to reflect the stronger-than-expected outlook for the North Sea.

barchartscotland

Alex Salmond, meanwhile, could quite feasibly have used two other far punchier projections for North Sea oil revenues (note from the chart above that the Scottish Government thinks revenues could be considerably higher); he was being relatively cautious in the White Paper.

In other words, as things stand, Alex Salmond’s projections for Scotland’s fiscal position in 2016/17 may well be closer to the truth than the IFS’s.

Having said that, what this exercise underlines is the difficulty of attempting to make any assumptions about Scotland’s oil wealth or fiscal problems given how volatile those revenues are likely to be. This is the main economic issue facing the country: it is a petro-economy, meaning its fortunes are dependent on aspects entirely out of its control – from the oil price, to oil production, to incidence of accidents on its rigs. Granted, Norway has an even bigger dependence, but at least it has a big sovereign wealth fund to fall back on. An independent Scotland will be in a far trickier position.

However, Danny Alexander does himself no favours by predicating his argument against independence on a figure which is likely to underplay Scotland’s oil revenues quite considerably. He should focus on what really matters: that there are far too many unanswered economic questions in the Scottish White Paper.

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