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Oil Volatility Means Cuts or Tax Rises for Scotland

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Oil has always been central to the nationalist case for independence. It has been used to reassure us that leaving behind the strength and security of being a part of the UK was not such a big risk in an uncertain and unstable world. It has also been used by the SNP to make all sorts of expensive promises about what would happen after independence - in the last few days alone we have heard that we could retire earlier and have an airforce of fast jets.

The inconvenient truth which the SNP have always struggled to deal with is that all the revenues from the North Sea currently go towards spending on public services, pensions and benefits in Scotland. As the impartial Institute of Fiscal Studies found again a few days ago, public spending is £1,200 higher per head in Scotland than across the UK. It is this higher spending that stands behind the success of the Scottish Parliament.

We have always argued that the proposal by the nationalists to pay into an oil fund made little sense when Scotland was already running a net fiscal deficit. Common sense tell us that you shouldn't borrow money and save it at the same time. It would be the equivalent of taking out a loan to put the money into your savings account.

The SNP Government's Fiscal Commission Report on Monday kicks the idea of an oil fund into the long grass. Even they admit that Scotland would have to run a surplus before we could create a fund and that is "unlikely in the years immediately following independence." This report finally settles the argument on an oil fund. We could not afford it without big tax rises or big cuts.

What is new and significant in this report is their suggestion that Scotland would need a separate "stabilisation" fund in order to deal with the fact that an independent Scotland would be dangerously reliant on volatile oil revenues.

Currently oil revenues make up just 2% of the UK tax take, but an independent Scotland would rely on North Sea revenues for anything up to 20% of our tax revenues. So spending on public services would depend on the ups and downs of world oil prices.

The solution to this, say the SNP, is to establish this stablisation fund. They suggest planning public finances on the basis of a particular oil price level of production and then, in the years when the oil price exceeds that level, save some of that money to fill the gap in public spending that we would face when the price drops.

It sounds fair enough until you remember that even in the years of highest oil prices in the last decade Scotland has still run a fiscal deficit. Even when the oil price is at its highest, taxes raised in Scotland do not cover existing spending in Scotland. It is an unavoidable fact found in the SNP government's own figures that Scotland has not run a surplus at any time in the last 10 years.

In the absence of that oil-generated surplus, to establish a stablisation fund we would need to cut existing expenditure or raise taxes. That is the price of exposing ourselves to this risk if we vote to leave the UK next year.

Our argument has never been that Scotland couldn't be independent, but whether it would be in our best interests. The SNP's own report shows once again why sharing risks, resources and rewards as part of a bigger United Kingdom offers the best future for Scotland.

Independence = big tax rises or bigger cuts

A recent Institute of Fiscal Studies report makes clear:

"Analysis of the fiscal situation facing Scotland in its first few years of independence suggest that if the OBR's forecasts for North Sea revenues are borne out, a newly independent Scotland could actually find itself with a somewhat larger budget deficit than the rest of the UK."

"Under the OBR's projections for North Sea revenues, Scotland's budget deficit may be 2.2% further into the red than that of the UK as a whole in 2017-18. To fill this hole would require a further £3.4billion of tax rises or spending cuts, on top of the £2.5billion required as part of the plans set out by the UK government."

"Assuming that it changed defence and ODA spending in line with stated SNP policy, and the rest of the required consolidation was delivered entirely by cuts to other public services, a £5.9billion total fiscal consolidation (£2.5billion plus £3.4billion) would amount to a cut of around 15%, based on 2011-12 levels of spending. If the Scottish government wanted to protect health and education spending, the cuts to other non-protected services would be close to one-third."

Independence = higher interest rates

Economists from the National Institute of Economic and Social Research made clear:

"An independent Scotland would face additional interest rate costs of between 0.72% to 1.65% above the UK borrowing costs for 10 year debt"

Alistair Darling is the Chair of Better Together and Labour MP for Edinburgh South West - this blog first appeared on the Better Together campaign blog, and can be read here

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