Today’s GERS figures show that Scotland’s underlying deficit fell
by more than that of the UK as a whole last year, when measured
as a percent of GDP. This reflects two factors: a rebound in
North Sea oil and gas revenues, which are overwhelmingly
generated in Scottish waters; and stronger growth in GDP
following a bigger fall in 2020-21 at the height of the COVID-19
pandemic. However, onshore revenues grew less quickly and
government spending fell by less in Scotland than in the UK as a
whole.
Scotland’s underlying public finances are set to significantly
further improve this year, 2022-23, again driven by surging North
Sea oil and gas revenues. Indeed, for the first time since the
early 2010s when oil prices and taxes were last this high
Scotland’s underlying deficit is likely to be similar to (and
perhaps even smaller than) that of the UK as a whole.
However, oil and gas prices are expected to fall back after a few
years, and even if they remain elevated, North Sea output is in
long-term decline. An independent Scotland would therefore still
eventually face bigger tax rises or spending cuts unless growth
in the onshore economy could be boosted.
David Phillips, Associate Director at the Institute for
Fiscal Studies said:
“Today’s GERS figures are a tale of two stories. The headline
numbers show Scotland’s deficit falling by more relative to GDP
than the UK as a whole, driven by a rebound in oil and gas
revenues, and a recovery in GDP from a bigger decline during the
height of the pandemic. However, digging deeper shows that
onshore revenues grew less quickly than the UK as a whole: they
are now £800 lower person, compared to around £500 lower over the
previous five years, and broadly similar to the UK average in the
early 2010s. Government spending also fell by less in Scotland
last year than in the UK as a whole.
Figures for the current financial year, 2022-23, will come just
before the date the Scottish Government hopes to hold a
referendum on independence. That timing could be fortuitous for
the ‘Yes’ camp as further increases in oil and gas prices,
together with the windfall tax on the profits of oil and gas
producers, mean Scotland’s headline overall deficit could be at a
similar or even lower level than the UK as a whole for the first
time in over 10 years.
But, the long-term decline in North Sea output means that even if
these higher prices are sustained, at best they would buy the
government of an independent Scotland more time to boost onshore
economic growth and revenues. Without this, an independent
Scotland would still likely face bigger tax rises or spending
cuts in the decades ahead.”
Read the observation in
full here.
ENDS
Notes to Editor
Scotland’s underlying public finances are improving as oil
and gas revenues rise – but long-term challenges remain is
an IFS observation by David Phillips and can be read in full on
the IFS website here.
