Oil 'will not rescue independent Scotland'

An independent Scotland would find it tougher to control its finances than the rest of the UK in the long term as oil and gas revenues decline, a report has warned.

The Institute of Fiscal Studies said that in the short term, depending on oil and gas prices and production levels, Scotland could "slightly more than pay for" Scotland's extra public spending per head compared to the UK as a whole.

Public spending per head is about £1,200 a year higher in Scotland than in the UK as a whole, at £11,800 in 2010-11 compared with £10,600 in the rest of the union, the report noted.

Scotland could cover this if oil revenues were shared out geographically, the think tank said. However, it cautioned that over the longer run, "if, as seems likely, North Sea oil and gas revenues fall, an independent Scotland would face a bigger fiscal adjustment than the rest of the UK".

David Phillips, one of the authors of the report, said: “Independence would provide Scotland with an opportunity to set its own fiscal course. In common with all countries it would face constraints and would have to make, sometimes uncomfortable, choices.

"In the short run its higher public spending than the UK average could be covered by oil and gas revenues if these are assigned on a geographic basis. In the longer run the loss of these revenues would lead to tougher choices than those faced by the UK as a whole.”

The IFS noted that on a geographic basis, North Sea oil and gas revenues would currently be "hugely important" to the budget of an independent Scotland. They would have accounted for over 15pc of revenues in 2010-11, compared with just 1.6pc for the UK as a whole. However, the IFS cautioned that such revenues are "very volatile".

On a geographic basis, Soctland's oil and gas revenues were more than 20pc of Scotland's total revenue in 2008-09, but just 12pc in 2009-10.

During the mid-1980s, they accounted for nearly half of all revenue, falling to just 3pc in 1991-2. "This degree of volatility in such an important revenue stream would pose challenges," the IFS cautioned.

The think tank added that an independent Scottish government would have "an important decision" to make around how to treat oil and gas revenues, with one possibility being to aim for budget balance, ignoring oil and gas revenues, several years down the road.

"Like the UK as a whole, and most other developed nations, an independent Scotland would face some tough long term choices in the face of spending pressures created by demographic change," said the report.

"If, as is likely, oil and gas revenues fall over the long run then the fiscal challenge facing Scotland will be greater than that facing the UK."

Alex Salmond's Scottish National Party has long argued that North Sea revenues would pay for its more extensive public services.

John Swinney, Scotland's finance secretary, has said that the IFS report demonstates that Scotland "more than pays its own way" and is in a better financial position than the rest of the UK.