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Government point to underlying strength

Scotland plunges into red on oil price slump

Nicola Sturgeon manifestoScotland spent £15 billion more than it earned in tax revenue in the last financial year, prompting more questions for the government as it sets out the economic case for independence.

The Government Expenditure and Revenue Scotland bulletin, known as GERS, showed the deficit ran to almost 10% of Scotland’s output, or double the level for the whole of the UK.

Fingers pointed mainly at the slump in the oil sector and to the SNP’s forecasts for growth in its 2014 blueprint for independence which based its figures on an oil price more than twice its current level.

First Minister Nicola Sturgeon yesterday preferred to focus on the ‘onshore’ economy, pointing out that non-oil sector revenue has grown by more than £6 billion over the last five years.

Including North Sea revenue, tax receipts per person have also remained broadly in line with the UK as a whole, at approximately £10,000 per person, she said.

However, the publication also shows the impact of the decline in North Sea revenue, with Scotland recording a net fiscal deficit equivalent to 9.7% of GDP in 2014-15. Excluding public sector investment, the current budget balance is equivalent to 7.8%of GDP.

Ms Sturgeon said: “The annual GERS publication shows our onshore economy is doing well, with estimated onshore revenue growing by 3.2% and tax receipts broadly comparable to the rest of the UK.

“Taken in the context of the wider economic environment, which has been impacted by muted global demand, falling oil prices and more difficult conditions for manufacturers, the economy has remained resilient with record levels of employment, positive economic growth and growing exports.

“This shows the foundations of Scotland’s economy are strong and that we have a strong base to build our future progress upon.

“These GERS figures show our strategic priority of investing in economic growth – with spending per head on economic development in Scotland more than twice the UK average.

“However – despite the fact the onshore economy accounts for more than 90 per cent of Scotland’s output – Scotland is clearly not immune to the problems being felt by the oil industry internationally.

“Although it is important to bear in mind that these are figures from just one year, and while we are doing what we can to mitigate these problems, this needs immediate action from the UK Government.”

Deputy First Minister John Swinney urged the UK Government to cut tax in order to make the North Sea more competitive globally. He said: “In next week’s UK Budget, I urge the Chancellor to take bold steps. Immediate action is needed to support the industry and make the North Sea more internationally competitive – primarily by a substantial reduction in the headline rate of tax.

“I am also urging the Chancellor to remove fiscal barriers for exploration and enhanced oil recovery, to implement fiscal reforms to improve access to decommissioning tax relief and encourage late life asset transfers, and urgently consider additional non-fiscal support – such as government loan guarantees – to sustain investment in the sector.

“The North Sea needs urgent help from the UK Government, both for the sake of the industry and the wider economy.”

Tom Faichnie, a partner at RSM in Scotland said: “This report covers the financial year 2014-15 and as a result, doesn’t take account of more recent developments in the Scottish economy and the damaging effects of a prolonged low oil price. The Scottish economy may have remained resilient during the year in question, but this should not be a reason for complacency now.

“It is no great surprise that Mr Swinney has repeated his call for a reduction in the headline rate of tax for the oil sector. While this would of course be welcomed, it would not address the issue that the North Sea has to encourage more exploration and development and attract new entrants into the market who operate with a lower cost base than many of the existing operators.

“As exploration activities are, by their nature, loss making, cutting the headline tax would not on its own drive operators to increase exploration and development.  Instead – or in addition – the Chancellor should look at other tax incentives to encourage investment, perhaps taking the lead from Norway, which operates a tax incentive scheme where exploration and development losses are recoverable in advance of the profits being made and which can be used as security for debt funders.

“Unfortunately, we have a tax structure where rates were set at a time when oil companies were making significant profits and when much of the rest of the UK economy was in recession.  These tax rates completely ignore the fact that the cash from these profits need to be re-invested into sourcing and developing new reserves.

“How can we now expect these loss making activities to continue when the operators are increasing production just to stay afloat? The tax system for the North Sea has to radically change and cannot just be done with a headline grabbing tax rate reduction.”



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