An independent Scotland would face a “challenging” financial position, making it “likely” cash would need to be used to support public services and reduce debt rather than being invested in an oil fund, Holyrood ministers have been warned.
There has been only one year out of the last 21 where the amount raised in tax in Scotland has exceeded public spending, reports prepared for the Scottish Government said.
The papers, released under Freedom of Information, added that as a result of this if the Government “had wished to establish an oil fund, it would have had to reduce public spending, increase taxation or increase public-sector borrowing”.
Plans to establish two oil funds – a short-term one to help deal with fluctuations in oil and gas revenues and a long-term savings fund – in an independent Scotland have already been outlined.
Finance Secretary John Swinney said last week that Scotland would be able to borrow, save and reduce debt simultaneously without raising taxes or cutting public services if it put some cash into an oil fund.
He said today the papers released under Freedom of Information were part of ministers’ “early thinking” about an oil fund.
Since then experts in the Fiscal Commission Working Group, established by the Scottish Government, have published their paper on the issue which said money could start being paid into an oil fund within a year of independence.
The papers released under Freedom of Information highlighted that “despite being in a relatively stronger fiscal position than the UK, Scotland has run a net fiscal deficit in 20 of the past 21 years”.
They added: “This suggests that over this period North Sea receipts would have been required to fund public services in Scotland.
“Therefore if the Scottish Government had wished to establish an oil fund, it would have had to reduce public spending, increase taxation or increase public sector borrowing.”
They went on to state that if a country invested in an oil fund while it was running a fiscal deficit – where public spending exceeds tax receipts – its investments “will be funded by borrowing”.
If the oil fund investments achieved a higher return than the cost of borrowing, the government would make a profit, but if the costs of borrowing were greater the government could see a loss.
“There is no guarantee that the return on a fund’s investments will exceed the government’s borrowing costs,” the papers said.
They added that an independent Scotland would have greater control over public finances and the economy, saying: “This could provide opportunities to boost tax revenue and achieve greater public-sector efficiencies, thereby freeing up resources for investing in an oil fund to support long-term fiscal sustainability.”
But they went on to warn: “Given the timing of the referendum and the long-term adjustment required to restore the public finances to a sustainable position, an independent Scotland is likely to inherit a challenging fiscal position.
“There is therefore likely to be significant demand, at least in the years immediately following independence, to use any additional resources to support public services and reduce public sector debt rather than investing in an oil fund.”
Mr Swinney said the released papers were “part of the early thinking of the Scottish Government, where we were thinking the only way we could contribute towards an oil fund was when the public funds were in surplus”.
But he added the work of the Fiscal Commission Working Group had shown contributions could be made to an oil fund when the country still had a deficit as long as the debt was declining and was at a “sustainable level”.
The Finance Secretary told the Good Morning Scotland programme: “If debt is reducing and is on a downward path, the level of debt is somewhere probably below 3% it is prudent and responsible to invest in an oil fund.
“We’ve got debt to pay off, a lot of it run up by Alistair Darling when he squandered the public finances, but we’re also wanting to prepare for the long term so future generations don’t have to go through what we’ve gone through.
“What the Fiscal Commission have put together is a sustainable framework which says if you’re debt is heading on a downward path and it’s heading below 3%, it is safe to invest in a long-term investment fund.”
Chief Secretary to the Treasury Danny Alexander claimed the papers released under Freedom of Information were “yet another example of the Scottish Government saying one thing in public and another in private”.
Mr Alexander added the documents “completely discredits everything they have ever said about an oil fund”.
He stated: “I have been saying for some time that for an independent Scotland to create an oil fund they will have to make significant cuts in spending or raise taxes. Now it emerges the Scottish Government secretly agree with me.
“The North Sea is a huge asset but it is not a pot of gold that will wipe away Scotland’s financial problems forever.
“An independent Scotland would need oil just to fund existing public services in the face of a worsening fiscal position. The Scottish Government then need to answer the question – what happens when the oil runs out?”
