Low oil prices could have a direct impact on the Scottish public purse when income tax is devolved, a think-tank has warned.
Oil revenues remained reserved to Westminster in both the Scotland Act 2012 and the Smith Commission, but Scotland will receive 10p in the pound from next year with full income tax receipts promised in the next round of devolution.
Fiscal Affairs Scotland said it is unclear whether oil prices will return to the average £70 a barrel seen in the last three years.
While the present low of around £33 a barrel impacts on taxes taken by the UK Treasury, it will not impact directly on Scottish funding levels. But if oil companies cut staff or wages it could have an impact on Scotland’s income tax take, Fiscal Affairs Scotland said.
It has called on the Scottish and UK governments to fund research into the direct impact falling oil prices could have on Scottish public spending in the post-Smith Commission negotiations.
Its January bulletin states: “The oil price seen in recent years has been relatively high. In sterling terms, the annual average real terms price in the last three years (2011- 2013) has been around £70 a barrel.
“This appears atypical, given there has been only one year, 2008, where the average real price was higher and even in the early 1980s the annual average price was close to £50 a barrel.
“Hence, while the price may well bounce back, it is unclear whether such a bounce back will reach the relatively high price levels experienced prior to the current collapse and, even if it does, if it will remain that high in the long run.”
It added: “The impact on the UK is different to most countries as it is both an oil producer but also an oil importer.
“On balance most analysts think that growth will receive a small boost as a result of the price fall.
“The impact on public finances, however, is likely to be negative, at least in the short term, as North Sea oil tax revenues fall by more than other (non-oil activity based) tax revenues rise.
“For Scotland, as North Sea related taxes have not been devolved as part of the Smith Commission recommended package, then the fall in the oil price will not impact directly on Scottish funding levels.
“However, falls in indirect oil related activity could impact on Scottish funding. This could happen as a result of lower income tax due to lower employment and/or lower wages of those workers involved in the oil industry who are Scottish residents.
“It is estimated that around 450,000 people in the UK have jobs connected with the North Sea and that around half of them are in Scotland.
“Sir Ian Wood has estimated that around 10% of all jobs could be lost over the next five years as a result of the lower oil price.
“It is very difficult to estimate how much of an impact this would have on Scottish Government tax revenues but it may well be something that the Scottish and UK governments spend some resource exploring as part of the post Smith Commission negotiations.”
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