Think tank claims independence will lead to fiscal shortfall

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  By Martin Kelly
 
An academic think tank, which has links to the Labour party, has launched another attack on independence, claiming Scotland will be worse off than if it remains in the Union.
 
The Centre for Public Policy for Regions (CPPR) has issued yet another report it says shows revenues from the North Sea will not be enough to make up shortfalls from tax receipts that would have come from the UK Treasury.

According to the report: “In effect, Scotland would be giving up the net transfer from the rest of the UK implicit in the existing Barnett arrangement, of around £7bn a year in cash terms, whilst retaining its geographic share of North Sea revenues, now estimated by OBR to be between £3.3bn to £4bn by 2015-16 and projected to fall further.”

Critically, the CPPR report assumes the Barnett Formula will remain in place.  The formula calculates spending for the devolved administrations of Scotland, Wales and Northern Ireland based on public spending in England.

The latest report is based on new revised forecasts for the oil and gas sector from the Office of Budget Responsibility (OBR).  This week the OBR revised its forecasts for revenue down further from figures earlier this year (Page 109 of report).

The new figures can be seen below, alongside earlier forecasts from this year’s budget.

The latest CPPR report added: “In fact, the latest forecasts suggest that, post independence, North Sea oil and gas revenues would be providing only around half of the net transfer (from the rest of the UK) that the Barnett formula system currently provides.  If this situation were to come about then it would require higher borrowing to retain the same level of public spending (assuming no changes in taxation and spending patterns or changes to Scotland’s trend rate of economic growth).”

However concerns have been raised over the apparent uncritical acceptance of OBR oil and gas forecasts by the CPPR with the Scottish Finance Secretary John Swinney this week describing the latest OBR forecasts as “curious”.

This week Professor David Bell of Stirling University joined those questioning the ability of the body to forecast accurately, when he said: “The forecasting record of the economics profession in general is not good.  The same can be said specifically about the forecasting record of the OBR.”

The academic added: “There could be a particular focus on forecasting North Sea oil revenues, which has proved controversial in the past,”

In October members of the CPPR were forced to respond to claims their reports were too negative and were over reliant on estimates provided by the body created by Tory Chancellor George Osborne.

Writing in the Scotsman newspaper, Professors John McLaren, Jo Armstrong and Ken Gibb rejected claims they relied solely on forecasts from the OBR and insisted they had included a range of forecasts from other bodies.

In a letter, the three said: “In fact, CPPR used a variety of forecasts including those by the Department of Energy and Climate Change and the Scottish Government, as well as illustrating the extent of this range, which included projections by the Norwegian government, and why it comes about.

“With regards to OBR’s forecasts, it is worth reiterating that it has consistently overestimated North Sea production and revenues in recent years. Indeed, the most recent North Sea revenues outturn for 2012-13 was below all five of the Scottish Government scenarios from earlier this year, as well as OBR’s”

The latest report also bases its claims on the continuation of the so-called Barnett Formula, which is the method used for calculating Scotland’s block grant.  There have been concerns that Westminster is planning to scrap the formula in the event of a No vote.  The SNP has claimed scrapping Barnett would lead to a four billion pound cut to Scotland’s budget.

Quizzed by Newsnet Scotland on whether the CPPR believes the Barnett Formula will indeed be scrapped or altered significantly, resulting in a loss to the Scottish budget, Professor John McLaren replied:

“We have no firm view on what might happen to Barnett but do acknowledge that it might change and that this might negatively impact on Scotland.”

However when asked why, given that the CPPR had no firm view, they had assumed the system will remain in place following the referendum, the academic replied:

“The projections we make are based on OBR’s economic forecasts.  Any decision over Barnett would be a political decision.

“Currently we have no basis on which to assume an alternative Barnett related change.”

The objectivity of the CPPR has been called into question with senior members’ links to the Labour party being highlighted.

John McLaren worked as a researcher for the Labour Party for a year leading up to the first election (1999) of the new Scottish Parliament, being subsequently appointed as a Special Adviser by Donald Dewar, and then by Henry McLeish, for the period up to 2001.

He was a member of the Labour Party from 2000 to 2005.  In 2006 Mr McLaren was hired by the Labour Party on a consultancy basis to undertake work leading up to the 2007 election.  Mr McLaren’s CPPR colleague, Jo Armstrong who is joint author of the latest report, was an adviser to Labour First Minister, Jack McConnell.

The CPPR has been a constant critic of the Scottish Government claims on North Sea Oil revenue.

In March this year, the think tank rejected Scottish Government claims that the North Sea was experiencing another oil boom.  The CPPR insisted that revenues would at best remain the same or fall slightly in real terms and remain well below the 2011-12 level.

It added that “to suggest some sort of new oil-tax revenue boom is about to emerge is not readily supported by the evidence”.

This year the oil and gas industry enjoyed record investment with £13.5bn set to be targeted at the sector. 

Speaking in August, Oil & Gas UK’s chief executive, Malcolm Webb said the sector was worth £40bn to the UK Treasury and supported hundreds of thousands of jobs.

Mr Webb said: “The offshore oil and gas industry generates almost £40 billion a year for the economy by producing oil and gas worth £32 billion and by exporting oilfield technology and expertise worth £7 billion.”

He added: “The industry is the UK’s largest industrial investor and contributor to gross value added. With 15 to 24 billion barrels of oil equivalent (boe) still remaining to be developed, the UKCS possesses great potential for contributing to economic growth for decades to come.”