Scottish independence: Tax rises or spending cuts required amid North Sea oil decline

A leading think tank has said an independent Scotland would face increased taxes or spending cuts amid the long-term decline of North Sea oil and gas.

The Institute for Fiscal Studies (IFS) was commenting following publication of the Government Expenditure and Revenue Scotland (GERS) figures which showed that Scotland’s deficit fell to £23.7bn in 2021/22, equivalent to around 12 per cent of GDP.

The IFS said Scotland’s public finances would improve “significantly” this year due to money from North Sea oil and gas revenues. It said Scotland’s underlying deficit was likely to be similar to or even smaller than that of the UK as a whole for the first time since the early 2010s.

However, analysts warned that with oil and gas prices expected to fall back eventually and with the North Sea in long-term decline, an independent Scotland would face bigger tax rises or spending cuts unless 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.”