Oil price slump wrecks Scotland’s financial forecasts

A month before last year’s Scottish independence referendum, Nicola Sturgeon, then deputy first minister, visited the Shetland islands and told residents they were “on the cusp of the second oil boom”.

At the time, the oil price was about $100 a barrel, and the Scottish government’s blueprint for independence was predicated on it rising slightly to $110. Instead it has slumped to $50.

The tumbling oil price has wreaked havoc with the Scottish government’s financial forecasts for independence, which promised higher public spending without significant tax rises. And yet support for independence continues to rise.

This year the Institute for Fiscal Studies calculated the falling oil price had opened up a £7.6bn black hole in the Edinburgh government’s plans for full fiscal autonomy — a step below independence. According to the IFS, that figure rises to £9.7bn by 2020.

David Phillips, senior research economist at the IFS, told the Financial Times: “The fall in the oil price has opened up a bigger fiscal gap, meaning a fiscally autonomous Scotland would face significant challenge to get its budget in the black.”

Analysis from the Office for Budget Responsibility shows how stark the situation is in the long term. In the 20 years after 2020, the OBR says, the government should not bank on any net tax revenue from the North Sea — anything that comes into the Treasury could be cancelled out by what it is spending on tax breaks for decommissioning.

The Scottish National party has responded by insisting that independence would allow the government in Edinburgh to boost the economy to compensate for the shortfall, in part by increasing public spending.

Ms Sturgeon, now Scotland’s first minister, said earlier this year: “I believe and always will believe that the best way forward is to be in charge of our own resources, so we don’t have to be subject to the kind of cuts coming at us from the UK government, but instead could be masters of our own destiny.”

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The SNP insists it is not reliant on North Sea oil income to make independence work. But the Scottish government’s own figures show that from 2000 until 2012, oil and gas revenues contributed between 10 and 20 per cent of the total public sector revenue.

But for the SNP’s opponents, these figures have not affected their political fortunes. The latest polls show support for independence just a couple of percentage points behind support for the union — if the referendum was re-run now, it would apparently be a much closer result.

John Curtice, the polling expert, said: “We are moving now to a world where Scotland is more reliant on its own tax base for public spending. But there is relatively little discussion about this or the implications of it.”

Mr Curtice argues that the SNP has successfully focused on which powers were being transferred under the latest round of devolution, rather than what they would do with those powers or how tax receipts might be affected.

He said: “They have been helped by the fact that there hasn’t been a unionist campaign since September 18, 2014. The Labour party have been involved in a double leadership campaign and other parties have stopped speaking about it so much.

“The SNP have frankly had the field to themselves.”