Scotland is on the brink of self-inflicting £1.6 billion in budget cuts because of devolved powers

Skara Brae, Scotland
Skara Brae, Scotland Flickr/ Dorli Photography

Scotland is on the brink of self-inflicting £1.6 billion ($2.1 billion) worth of budget cuts over the next five years because
newly devolved tax powers mean it becomes increasingly reliant on its own strained economy, when you look at new data from the research unit F
raser of Allander Institute (FAI).

Scotland voted to keep the country within the UK in 2014 and part of this was because of promises made by the then-prime minister David Cameron to grant greater devolved powers to Scotland.

This somewhat appeased the ruling Scottish National Party who is consistently pushing for another referendum because it wants to break the 310-year-old union.

But while England’s parliament is keeping to its word and granting Scotland greater devolved powers over the next five years, like control over local taxation on the local economy, the FAI warn that this could lead to a 6% fall in the country’s annual budget.

According to a report by the FAI, the move for devolved powers was designed to introduce “both greater risk and greater reward to the Scottish budget,” but the risks appear to be overshadowing the rewards.

Scotland’s local economy is in a very fragile condition: it has grown just 0.6% this year, compared to 1.7% for the rest of the UK.

This is how Scotland’s GDP has sunk by sector:

Screen Shot 2016 09 14 at 09.25.58 (2)

Traditionally, that would not been hugely significant, as the country relied almost entirely on an annual block grant from Westminster.

But Philip Hammond is set to slash that sum by up to 6% in his Autumn Statement in November, as the UK continues to tighten its fiscal spending.

And the Scottish parliament’s new powers will mean it has responsibility for raising between 30% and 40% of total tax revenues raised in Scotland — so a poorly performing economy will mean significantly less tax receipts.

The report said that “delivering these new powers in ‘normal’ times would be challenging enough,” but “they are being delivered at a time of significant fiscal challenge and economic uncertainty.”

“Urgent action is needed to grow our economy — not just in the light of the current Brexit uncertainty and the downturn in Scotland’s oil and gas sector — but also to face up to the longer term challenges of an ageing population, rising inequality, technological change and rapid globalisation.”

The downturn in Scotland’s oil and gas sector is hugely significant:

Screen Shot 2016 09 14 at 09.28.40 (2)

Oil accounts for two-thirds of the country’s profits and a large slice of employment in Scotland. So if the price falls, so does revenue and the health of the country’s balance sheet.

Oil prices fell to low double digits from over $100 per barrel in June 2014 — oil prices are still struggling to stay above $50 per barrel. Meanwhile, North Sea oil reserves are drying up.

In 2014, the Organisation of the Petroleum Exporting Countries (OPEC) laid out how the North Sea oil industry is in dire straits. The average oil output in 2013 from the North Sea clocked its lowest level since 1977. The Office of Budget Responsibility also showed production forecasts for North Sea oil continue to drop dramatically.

Even at the beginning of 2015, Bank of England Governor Mark Carney estimated that the oil price plunge alone will hit Scottish GDP by £6 billion over 2016. So this all falls in line with economists’ projections.

Meanwhile, to make matters worse, the ruling Scottish National Party (SNP) have also made several expensive pledges – such as increasing NHS spending by £500 million above inflation by 2021, and doubling the provision of childcare.

The FAI suggest that, in the worst case scenario, the SNP may have to slash unprotected government department budgets by up to 17% in order to fund such pledges.

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