Scotland has seen a windfall - but the fiscal reality remains unchanged

This article by Professor Jim Gallagher first appeared in The Times on 16/08/2023

Scotland has seen a drop in the public sector deficit, but the Gers report has thrown up a number of questions.

Sometimes the windfall lands on your side of the fence. Soaring oil prices, thanks to the war in Ukraine and the UK chancellor’s windfall tax on energy companies, mean the latest Government Expenditure and Revenue Scotland (Gers) figures are the most flattering independence supporters have seen for a decade or more. But the underlying fiscal reality remains the same.

Even with increased oil revenues, Scotland’s public sector deficit at £19 billion — or 9 per cent of GDP — is worse than the UK’s, which is bad enough at 5 per cent. If we ignore oil money, Scotland’s deficit was a stonking £28 billion, or 15 per cent of the value of the whole Scottish economy.

So even at £9 billion this year, oil is, as the SNP’s fiscal commission famously said, a bonus, not a basis for a separate state.

It’s important to understand what is driving the numbers. Whatever oil does, Scotland has a structural deficit of about £15 billion a year more than the UK average. Some of this caused by lower tax revenue. We have 8.2 per cent of the UK population and 7.7 per cent of the onshore tax revenue. Not disastrously bad, and marginally up this year, but it means over £850 less tax per head of population — a gap of £4 billion a year.

But it’s higher public spending — over £11 billion or £2,200 per head a year more — that really drives the big deficit. The extra mostly goes on the public services run by Holyrood, which are more than 25 per cent higher per head than in England. This comes from the Barnett formula — the mechanism used by the treasury to allocate public expenditure across the UK.

The Scottish government fights tooth and nail to keep every advantage it gives and who can blame it, but it vanishes the day Scotland decides on independence.

Gers throws up three questions. First, the hardy perennial on independence. Nothing new there, despite a good year for oil. These spending and tax levels would be the starting point for a separate state, which could not sustain them. Humza Yousaf is said to be considering a new fiscal prospectus for independence. Done honestly, it can only make bleak reading.

Second, what about the North Sea? Does Scotland keep pumping and burning oil and get those bonus revenues, or sacrifice them to mitigate the climate crisis? We can’t do both. Scottish minsters equivocate on this. Holyrood will talk least about the third question, because it’s their day job and because it’s difficult. The questions is: what do we get for that extra spending?

Whatever happens in our politics, Scotland and the UK now face some very challenging budgetary times. That’s what happens when your economy flatlines for a decade. Scotland has the cushion of an extra 25 per cent spend on public services. Where does it all go now, and how can we use it to manage through the difficult years ahead? That’s the real question from Gers.