The UK’s fiscal outlook has improved modestly over the past few
months as oil and gas prices have fallen back a bit from their
2022 highs. The impact on Scotland’s underlying public finance
position is strikingly different though: volatile oil and gas
revenues matter much for overall Scottish tax revenues, so
Scotland’s underlying fiscal position has deteriorated
significantly as a result of the falling prices.
The Office for Budget Responsibility’s latest forecasts are for
the UK’s oil and gas revenues to have hit £11 billion in 2022–23
and reach just over £10 billion in 2023–24. This is a huge
increase from 2019–20 and 2020–21 when these revenues totalled
less than £1 billion in each year. But it is a significant
downgrade to its forecasts last November, when revenues were
expected to hit £15 billion in 2022–23 and almost £21 billion in
2023–24.
Given that the vast majority of oil and gas revenues are
generated from activity in Scottish waters, this downgrade
worsens the outlook for Scotland’s underlying public finance
position. Whereas November’s forecasts implied that in 2023–24,
Scotland’s underlying budget deficit might
be lower than that of the UK as a whole (for
the first time in over a decade), the latest forecasts suggest
Scotland’s deficit could be close to
£1,300 higher per person than that of the UK
as a whole.
David Phillips, Associate Director at the Institute for
Fiscal Studies said:
“The fall in forecast oil and particularly gas prices since last
autumn is welcome news for households, business and the public
finances of the UK as a whole. However, the fact that the vast
majority of the UK’s oil and gas revenues are from taxing
activities in Scottish waters means that Scotland’s underlying
public finances will improve by a lot less in the coming year
than previously expected: lower prices mean lower revenues.
As a result, the underlying Scottish budget deficit now looks set
to remain significantly higher than that of the UK as a whole
this year and next, in contrast to what we thought last autumn.
This highlights just how significant volatile oil and gas
revenues are in a Scottish context. In addition, this gap between
Scotland’s deficit and that of the rest of the UK will grow
further in the longer term as oil and gas production in the North
Sea slowly declines, unless new revenue-rich sources of economic
growth for Scotland can be found.”
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