Falling energy prices mean Scotland faces higher deficit than rest of UK, IFS warns

Scotland’s deficit could be about £1,300 per person higher than the UK as a whole due to the impact of falling oil and gas prices, according to analysis.

The Institute for Fiscal Studies (IFS) think tank said the change in oil and gas prices, while good news for the UK as a whole, has led to Scotland’s financial projections having “deteriorated significantly”.

The latest forecast from the Office for Budget Responsibility (OBR) predicts the UK’s oil and gas revenues will hit £11 billion in 2022/23 and just over £10 billion the following financial year, a marked decrease from its forecast last November which expected revenues to reach £15 billion then almost £21 billion respectively.

The IFS said this has a particularly detrimental impact in Scotland since most of the UK’s oil and gas revenues are generated from activity within Scottish waters.

The think tank said November’s forecasts implied Scotland’s underlying budget deficit for 2023/24 might be lower than that of the UK as a whole for the first time in more than a decade but the latest forecasts suggest Scotland’s deficit could be close to £1,300 higher per person than that of the UK as a whole.

🚨 NEW @theIFS analysis of Scotland's underlying fiscal position shows that the fall in oil and esp. gas prices from their 2022 peaks means Scotland's underlying deficit is now likely to remain substantially higher than that of the UK as a whole.https://t.co/pSTgkbFdWG pic.twitter.com/BKGdnSmIDU
— David Phillips (@fiscalphillips) April 3, 2023

David Phillips, IFS associate director said: “The fall in forecast oil, and particularly gas, prices since last autumn is welcome news for households, business and the public finances of the UK as a whole.

“However, the fact that the vast majority of the UK’s oil and gas revenues are from taxing activities in Scottish waters means that Scotland’s underlying public finances will improve by a lot less in the coming year than previously expected: lower prices mean lower revenues.

“As a result, the underlying Scottish budget deficit now looks set to remain significantly higher than that of the UK as a whole this year and next, in contrast to what we thought last autumn.

“This highlights just how significant volatile oil and gas revenues are in a Scottish context.

“In addition, this gap between Scotland’s deficit and that of the rest of the UK will grow further in the longer term as oil and gas production in the North Sea slowly declines, unless new revenue-rich sources of economic growth for Scotland can be found.”

The Scottish Government has been contacted for comment.