Scottish oil fund proposal will require Holyrood to show courage


By Professor Alex Kemp
The proposals from the Fiscal Commission Working Group reflect a combination of the intellectual case for an oil fund and the budgetary realities likely to be faced by an independent Scottish Government.
For any oil-producing country there is a clear case for the establishment of an oil fund because the revenues emanate from the depletion of a non-renewable natural resource.

The oil reserves constitute part of the total capital stock of the nation and their depletion constitutes a diminution to that stock.

To preserve the capital stock the profits, after all costs, should be reinvested.

The income from the fund investments can be consumed year by year, but not the capital itself.

But the realities of the budgetary position facing a Scottish government over the next few years include a likely budgetary deficit which would make it impossible to allocate the oil revenues to an oil fund without increasing other taxes or decreasing public expenditure.

The commission thus proposes a stabilisation fund into which monies would be paid when oil revenues were buoyant and from which monies would be drawn when oil revenues were low to meet departmental spending needs.

There would thus be two funds with separate functions.

Currently there is much controversy not only over the future behaviour of oil prices. This is not unusual. They are a major determinant of tax revenues.

But future oil production is also subject to much uncertainty. Some estimates foresee a reversal of the recent sharp declines and an increase over the next five to six years.

Meanwhile others, including the Office for Budget Responsibility, foresee no increase at all and a sharp, long-term decline.

These differences of view help to explain the major differences in estimated tax revenues.

The very large capital investment currently taking place in the North Sea generates equally large capital allowances which reduce taxable income and so tax receipts in the near term.

With present information and trends it would require courage on the part of a Scottish government to establish an alienated oil fund over the next few years.

Norway took that step some time ago.

It is noteworthy that other taxes in Norway are not lower than in other oil-producing countries. For example, the rate of value added tax is 25%, compared to 20% in the UK.

Courtesy of Professor Alex Kemp – This article originally appeared in Energy Voice
Professor Kemp is professor of petroleum economics at Aberdeen University