Editor BILL JAMIESON says Scotland’s finance minister John Swinney is a hard man to cheer – his countenance is especially grim in budget week.
This is when he warns – as he has warned almost every year since 2010 – of “challenges ahead”. This year the budget pre-briefing has struck a darker note: “tough choices” is the warning.
But he has one cause for cheer: he does not have to present the budget of an independent Scotland. With the dramatic collapse in the oil price from $115 a barrel during the independence referendum to just $37.45 today an enormous hole has been blown in those SNP projections of a budget surplus.
Back in 2013 the SNP administration was basing its financial planning on an oil price of $113 per barrel, claiming the sector would generate between £15.8 billion and £38.7 billion for the public purse over five years.
Now the most recent HMRC figures suggest that even the independent Office for Budget’s 2015/16 projection of only £700 million revenues may be optimistic given the continuing plunge in the oil price.
Indeed, the official figures point to the first loss recorded by a six-month period since North Sea oil started production 40 years ago. While the Treasury collected £248 million in corporation tax and petroleum revenue tax (PRT) in the first half of this year, it paid out £287 million in rebates to producers – leaving a loss of £39 million.
And since late last year, 5,500 people directly employed in the industry have lost their jobs – 15 per cent of the total workforce — with estimates of the wider impact putting the jobs loss as high as 65,000 while investment has been slashed by £12 billion.
So much for the North Sea oil bonanza.
Now that the price has fallen even further, the finances of an independent Scotland would be far removed from the prospectus set out just 15 months ago. Nor is there is any confidence in the industry that the price will recover any time soon.
We will hear much from Mr Swinney tomorrow on spending pressures across government departments – all this routinely blamed on that most convenient of bogeymen – continued Westminster-imposed austerity.
However, the annual changes look less grim than the cumulative 12.5 per cent reduction often cited. The real terms reduction is just 1.2 per cent in 2017-18, 1.6 per cent in 2018-19 and 1.4 per cent in 2019-20. There is barely a commercial enterprise that has not had to improve efficiencies and trim its budget by much greater amounts.
However, continuing constraint on government spending may be the least of Mr Swinney’s problems. Latest survey data show that the private sector economy is now staring into recession. Output declined again in November, manufacturers are reporting falling new business and the outlook for the North Sea oil industry, with the Brent futures price now below $38 a barrel, has gone from bleak to black.
The Bank of Scotland reported yesterday that, for the second time in three months, business activity in Scotland’s private sector contracted last month, with a significant fall in incoming new orders.
At bank’s seasonally adjusted Purchasing Managers Index – a single-figure measure of the month-on-month change in combined manufacturing and services output – has declined to 49.8, down from 50.9 in October. The rate of contraction in the manufacturing sector was the sharpest in just over three years.
Incoming new orders received by private sector companies in Scotland declined for the second time in three months during November. Scottish goods producers registered a sharp contraction in both domestic and foreign demand.
The one crumb of comfort is a slight expansion in employee numbers in the private sector. But the rate of job creation is weak.
All this could be brushed aside as little more than a gentle decline in the rate of growth.
But looking out to 2016, Scotland’s three leading forecasting teams – Mackay Consultants, the Fraser of Allander and Ernst & Young are now predicting that Scotland’s economy will trail the UK.
And according to Capital Economics this week, Scotland is lagging well behind the 12 regions of the UK. “Indeed”, says CE, “Scotland still languishes at the bottom of the activity index table with its PMI staying below 50.0 in November – the mark which hypothetically separates economic expansion from contraction… The prospects of any recovery in Scotland in the near-term remain gloomy.”
“In summary”, says CE, “while November’s PMIs provided some good news, the upshot is that the economic recovery remains unbalanced across regions, and Scotland’s prospects are particularly poor.”
What of the revenue side of the budget?
Mr Swinney has foresworn any changes to income tax rates and levels for 2016-17. The real impact of the Scottish Rate of Income Tax will be felt when the Smith powers take effect from 2017-18.
Much work has to be done to establish a new fiscal framework for Scotland and to ensure the administration has the best independent, robust and reliable economic analysis and advice before launching forth on tax changes. Scotland at present does not have the equivalent of the UK’s Office for Budget Responsibility to guide the administration and to ensure that limits on the annual budget deficit and total outstanding debt are respected.
Here the role of the new Scottish Fiscal Commission will be critical in providing not only independent forecasts of economic performance but also forecasts of anticipated revenues from tax changes.
And the experience of the Land & Buildings Transactions Tax is sobering. Back in July the OBR forecast that L&BTT receipts from residential property for 2015-16 would hit £264 million. Its latest forecast slashed this to £178 million. Taking in commercial property, forecast total L&BTT receipts have been cut from £540 million to £397 million.
Tomorrow will bring Scottish government forecasts for all tax revenues beyond 2015-16.
Mr Swinney should not be surprised if these are given as close a scrutiny as forecasts for growth.