With most UK oil and gas production taking place in Scottish
waters, the taxes levied on this activity matter much more for
Scotland’s underlying, notional public finances than they do for
the UK as a whole. Sharp and unpredictable movements in oil and
gas prices – and production volumes – therefore mean Scotland’s
underlying, notional public finance position is also much more
volatile and uncertain. This matters relatively little under
current constitutional arrangements, but would require careful
management under full fiscal autonomy or independence, when
Scotland would become responsible for its own public borrowing
and debt.
UK oil and gas revenues averaged just £0.6 billion per year
between 2015–16 and 2020–21. In 2022–23 they amounted to £10
billion, and in 2023–24 they are forecast to amount to £5
billion. Compared with the late 2010s, these figures represent
increases equivalent to 0.4% and 0.2% of national income,
respectively, for the UK as a whole. But for Scotland, they
represent increases of over 4% and 2% of national income.
This has narrowed the gap between Scotland’s notional fiscal
deficit and that of the UK as a whole. But the improvement is
much less marked than expected in Autumn 2022, when oil and gas
revenues were forecast to be £15 billion in 2022–23 and over £20
billion in 2023–24. As a result, Scotland’s notional deficit this
financial year is projected to be around £2,450 per person higher
than that for the UK as a whole.
The gap in future years is highly uncertain but would widen if
oil and gas revenues fall closer to pre-2022 levels, as forecast
by the Office for Budget Responsibility, based on market
expectations of future oil and gas prices.
David Phillips, an Associate Director at IFS and author
of the comment, said:
‘Tax revenues from North Sea oil and gas production are volatile
and uncertain, and often driven by events thousands of miles away
– such as Russia’s invasion of Ukraine. The direct effects on
UK-wide tax revenues are fairly muted – indeed, as a significant
net energy importer, increases in revenues from oil and gas
producers when prices rise are likely more than offset by
reductions in other tax revenues as other sectors of the economy
suffer.
‘The situation for Scotland is different given most UK oil and
gas production takes place in Scottish waters. Scotland’s
underlying, notional public finance position, while less affected
by swings in oil and gas revenues than in the period between the
1980s and 2000s, is much more dependent on these revenues than
the UK as a whole is. Under current constitutional arrangements,
this does not matter a great deal, but that would change under
full fiscal autonomy or independence.’
READ THE BRIEFING
HERE.
ENDS
Notes to Editor
Oil and gas make Scotland’s underlying public finances
particularly volatile and uncertain is and IFS comment
by David Phillips.
You can read it on the IFS
website here.
