Public spending deficit rises as oil revenues fall

Scotland’s public spending deficit rose by £3.6 billion to £22.7 billion last year as oil and gas revenues halved.

The Scottish Government’s Annual Report on Revenue and Expenditure (GERS) examines taxes raised in Scotland and government spending for and on behalf of Scotland.

The study found the difference was greater than the £19.1bn the previous year, which was down from £23.7bn in 2021-22.

North Sea oil and gas revenues in 2023-24 have fallen from £4bn to £4bn.

The deficit represents a share of 10.4% of GDP, compared to 8.4% in 2022-23.

Scotland’s revenues in 2023-24 have increased by £1.7 billion to £88.5 billion, a 1.9% increase on 2022-23.

The government said this reflected growth in land revenues partly offset by falling oil and gas revenues.

Scottish incomes accounted for 8.1% of the UK total, a similar share to the population.

Spending rose to £111.2 billion from £104.9 billion in 2022-23.

As a share of GDP, government spending remained at historically high levels, at 51% of GDP, about five percentage points higher than before the pandemic.

The report estimates that spending per person in Scotland was £20,418, £2,417 more than the UK figure of £18,001.

The Scottish figure was up from £19,257 the previous year.

At the same time, per capita income in Scotland was estimated to be £361 lower than the UK average.

Gers is a national statistics publication and is prepared by Scottish Government officials independently of ministers.

It estimates the amount of tax revenue raised from people living in Scotland by the Scottish and UK governments, and the amount spent by the governments in and for Scotland.

This includes earmarked spending such as the state pension, devolved spending such as the health service, and some spending that may be made in the rest of the UK or overseas on behalf of Scots, such as the armed forces and UK embassies.

The difference between revenue and expenditure is called the “net budget balance” – commonly referred to as the deficit.

Statistics have often been a key pillar of the debate about the finances of an independent Scotland.

Economic research organisation Fraser of Allander Institute said Gers was relying on some estimates but that was part of all economic statistics and was not a reason to dismiss the figures as “made up”.

Overall, Gers showed that tax collected in Scotland per capita is just lower than that collected in the UK per capita.

However, spending per capita in Scotland was significantly higher than in the UK.

This is because of the way the Scottish Treasury block grant is calculated using the Barnett formula, which consolidated higher spending per person when it was introduced in 1979.

The Scottish Conservatives said the figures showed Scotland was doing better within the UK.

Conservative MP Russell Findlay said: “These statistics confirm that the SNP’s quest to break up the UK is over for the foreseeable future.

“The nationalists have no vision for creating jobs, stimulating businesses or growing our economy.

“SNP spending is out of control as John Swinney and his colleagues recklessly waste taxpayers’ money. The nationalists are only saved from the fiscal black hole they have created by the economic strength of the UK.”

Michael Marra, Scottish Labour’s finance spokesman, said Scots would be right to ask why public services were not better given the extra spending.

“When it comes to educational outcomes and hospital wait times, people deserve much better. We need to reduce wait times and increase outcomes,” he said.

“So it is time for the SNP to move beyond divisions and focus on results. This is the change Scotland needs.”

Finance Secretary Shona Robison said the deficit was “not a reflection of the Scottish Government’s finances or policies – it is a reflection of the UK Government’s choices”.

Scotland is not alone in having a theoretical deficit.

One of the roles of the UK government is to redistribute and equalise funding across the country. This has meant a fixed formula for the block grant sent each year to Holyrood, Cardiff and Stormont, as well as a ‘levelling up’ of funding for some regions of England.

Income tax rates in Scotland are higher than in most other parts of England, at £2,417 last year. At the same time, taxes collected per head in Scotland are generally similar to those in the UK. In the 2023-24 figures, revenue per head in Scotland was £60 higher.

This includes a Scottish share of oil and gas tax revenues, and these revenues can be volatile. They have soared as global energy prices have risen since 2021, boosting profits, justifying the introduction of a windfall tax and significantly increasing tax revenues.

Over the past decade, with falling prices, production and investment, tax revenues have fallen and even became negative one year.

But in 2022-23, Scotland’s share of the UK total – around 90% – reached £7.9bn. It has fallen back to £4bn in the most recent figures. That explains most of the increase in the notional deficit over the last two years.

The future development of oil and gas revenues remains uncertain. A further rise in global prices will lead to higher profits and tax revenues.

But we may never see such tax revenues again. Production is on a downward trend as North Sea fields mature.

This downward trend is likely to accelerate if the Westminster Labour government discourages new drilling by increasing the windfall tax, reducing investment allowances and scrapping new licences.