Savings and Stabilisation Funds for Scotland
Today the Fiscal Commission Working Group has published its Savings and Stabilisation report, a report I welcome in its recommendation to establish both a stabilisation fund and a savings fund in an independent Scotland.
Their work highlights the significant opportunities that Scotland’s oil and gas wealth presents and answers the key questions that have been raised about how this wealth should be managed in an independent Scotland.
Analysis in the paper shows that since 1980-81 Scotland has run an average annual net fiscal surplus of 0.2 per cent of GDP compared to an average annual deficit for the UK of around 3 per cent of GDP. If these resources had been invested into a savings fund then the country could now have accumulated financial assets of between £82 billion and £116 billion, as opposed to a share of the UK’s huge debt.
The report recommends that the government of an independent Scotland establish both a short-term stabilisation fund and a long-term savings fund, immediately following independence.
The first would be a stabilisation fund into which higher than forecast oil and gas revenues are deposited, minimising North Sea revenue volatility from changes in oil prices.
For example, the Scottish Government Oil and Gas Analytical Bulletin made forecasts for 2017/18 based on an oil price of $113 dollars a barrel. However a range of forecasts have been published. For example the UK Department of Energy and Climate Change and OECD are at the higher end, forecasting around $130 and over $150 respectively by the end of the decade. Under the Fiscal Commission Working Group proposals, if the oil price is higher than forecast, then the additional revenues are placed in the stabilisation fund, which is then used in years when the forecasts are undershot.
A second long-term savings fund would ensure that Scotland’s oil wealth provides a lasting benefit to the country.
Crucially, according to the report, the establishment of a long-term fund should not necessarily wait until public revenues exceed total public spending.
It makes clear there is merit in establishing and investing in such a fund when borrowing is manageable and debt is on a downward path as a proportion of national wealth.
This could be achieved when the overall deficit moves below three per cent of GDP, something that it is projected could happen as early as 2017/18 or when the economy moves into current budget surplus, i.e. a surplus in current revenues and spending excluding capital investment.
The paper does more than analyse the missed opportunities from the past.
It points out that we are still less than half way through the likely wholesale value of oil assets to be extracted from the North Sea. And it sets out a structure on how to make the most of those assets with a vote for independence.