Salmond goes to London as the IFS goes to Scotland

Alex Salmond last night delivered a speech in London in which he declared that an independent Scotland would be good for the economy of the remainder of the UK.

Alex Salmond last night delivered a speech in London in which he declared that an independent Scotland would be good for the economy of the remainder of the UK.

Pointing to the boost, he argued that it would give to the north an opportunity to rebalance UK PLC away from London.

Scotland’s first minister told those present:

“There’s a growing realisation that wealth and opportunities are too concentrated, geographically and socially. UK government policies are working for too few, and denying opportunities to too many. Britain is imbalanced.

“After Scottish independence, the growth of a strong economic power in the north of these islands would benefit everyone – our closest neighbours in the north of England more than anyone.

“There would be a ‘Northern Light’ to redress the influence of the ‘dark star’ – rebalancing the economic centre of gravity of these islands.”

However his speech came as new research by the Institute for Fiscal Studies (IFS) suggested that the Scottish government’s forecasts for revenues from North Sea oil continue to be too optimistic. Based on their analysis of the Office for Budget Responsibilities’ (OBR) report in December 2013, the IFS’s assessment of the state of Scotland’s likely finances if it votes for independence states:

“Our estimate of Scottish borrowing of 2.5 per cent of GDP in 2018-19 assumes that all the tax increases and spending cuts currently announced and pencilled in by the UK’s coalition government are implemented, including those planned in Scotland for after the date of potential independence.

“If, instead, the Scottish government did not want to cut non-debt interest public spending as a share of national income after 2016-17, then borrowing in 2018-19 would be 5.4 per cent of GDP (rather than 2.5 per cent of GDP)….In other words, to reach a position where borrowing was at 2.5 per cent of GDP in 2018-19 the government of a newly independent Scotland would need a fiscal tightening of 2.9 per cent of GDP between 2016-17 and 2018-19.”

Turning its attention to North Sea oil revenues, the report continued:

“There was one source of revenues that the OBR took a more pessimistic view on in December than they had in March: that was revenues from oil and gas production. As the vast majority of these revenues are generated in Scotland, a downgrade to this revenue stream has a much more adverse effect on Scotland’s fiscal balance than it does for the UK as a whole….As a result, the improvement in the fiscal position for Scotland suggested by the OBR’s December forecast….is not nearly as large as for the UK – indeed, in 2013–14 and 2014–15 our calculations suggest that Scotland would have a weaker fiscal position than was implied by the OBR’s March forecast.

“The outlook for Scotland is, however, very sensitive to the tax revenues received from oil and gas production and some forecasters take a very different view from the OBR on the prospects for these revenues over the next few years. In particular, the White Paper published by the Scottish government in November presented figures for Scotland’s fiscal position based on a forecast that Scottish oil and gas revenues would be somewhere between £6.8 billion….and £7.9 billion….in 2016–17. We estimate that the OBR’s forecast at the time implied revenues for Scotland (allocated on a geographic basis) of just £4.5 billion and that their latest forecast implies revenues of just £3.3 billion in that year.”

It concludes:

“We estimate that the OBR’s forecasts imply that Scottish borrowing in 2017–18 will be 3.6 per cent of GDP. However, if Scottish oil and gas revenues were to turn out as projected under the Scottish government’s ‘Scenario 2’ or ‘Scenario 4’, borrowing would instead be 1.8 per cent or 1.0 per cent of GDP respectively. These latter figures suggest a better position for Scotland’s public finances, similar to the position for the UK as a whole, which the OBR projects will have borrowing of 1.2 per cent of GDP in 2017–18.

It is worth noting in this context that it looks like the Scottish government’s forecasts for revenues under these scenarios have been too optimistic in 2012–13 and, with the vast majority of payments already having been made for 2013–14, that their forecasts for this year also look to be too optimistic. It remains to be seen whose forecasts might be more accurate going forwards.”

Responding to the report, a spokesperson for the Scottish government argued that Scotland would be more than capable of standing on its own two feet financially. They expanded:

“As Standard and Poor’s noted last week, even without North Sea oil and calculating per capita GDP only by looking at onshore income Scotland would qualify for their highest economic assessment.

“Per capita tax receipts in Scotland have been higher than in the UK in each of the last 32 years.

“The latest Government Expenditure and Revenue Scotland figures show that Scotland has been in a stronger fiscal position than the UK equivalent to £12.6bn over the period 2007-08 to 2011-12 as a whole.

“The North Sea oil and gas sector is also currently going through an investment boom with a record £14.4bn of capital investment in 2013.

“This investment is likely to have a positive impact on North Sea oil and gas production for years to come.”

The former chancellor and leader of the Better Together campaign Alistair Darling was not so positive, however, saying of the IFS report:

“The IFS has been clear that there would need to be big spending cuts and tax increases in a separate Scotland just to pay for independence. The last thing struggling families need is more cost and more cuts just to pay for independence.

“The experts also criticise the SNP’s unrealistic estimates for oil and gas. This means big cuts to the budget for our schools, hospitals and pensions and big tax rises for working people.

“Oil cannot pay for everything as the nationalists pretend and while independence would be forever, oil will run out.”

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