Scotland’s notional 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 by the Institute for Fiscal Studies (IFS).

In their latest forecast, the thinktank warns of a "notable deterioration in the outlook for Scotland’s public finances," and says "tax rises or spending cuts would likely need to be even larger" after independence. 

The warning from the IFS comes after a much rosier forecast in November when the war in Ukraine pushed prices up, and oil and gas revenues were predicted to reach £15 billion in 2022/23 and £21bn the following year. 

However, falling prices mean they are now expected to hit £11bn this financial year and then little more than £10bn.

This is still a massive hike compared to where revenues before the war in Ukraine when tax take amounted to less than £1bn 2019–20 and 2020–21.

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Nevertheless, this means the projected Scottish deficit in 2023–24 has been revised up from £9bn to closer to £18bn. 

Last November, the IFS said the 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.

Their projections were for Scotland’s deficit to decline from the equivalent of £4,340 per person in 2021–22 to £1,600 in 2023–24 as a result of a surge in oil and gas revenues.

Their latest projections are for Scotland’s deficit to now fall to £3,200 per person over the same period, around £1,300 per person more than that of the UK as a whole in 2023–24.

This gap could then grow to £2,400 per person by 2027–28 as oil and gas revenues further decline.

This, the IFS say, "would mean Scotland’s underlying deficit being just over 7% of GDP in that year – around 5.5 percentage points higher than the forecast UK-wide figure." 

Their report also states that Scotland faces "a difficult long-term fiscal outlook" in the union because of rising spending pressures placing a "strain on the public finances of the UK as a whole".

That will be compounded by the Barnett formula becoming "less generous to Scotland, as time goes by than has historically been the case." 

But, independence, they add, "would be no panacea for these challenges – indeed, Scotland’s larger budget deficit means that unless economic growth and hence tax revenues could be boosted, tax rises or spending cuts would likely need to be even larger. 

"That is why economic policy and economic growth are at the heart of debates about the effects of independence on Scotland’s public finances, and hence the taxes people could pay and the services they could expect to enjoy post-independence."

 

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.”

Responding to the report, Pamela Nash, chief executive of Scotland in Union, said: “Oil is a volatile commodity, but as part of the wider UK it means Scotland can absorb changes such as these.

“It’s one of the main reasons the people of Scotland voted to remain in the UK in 2014.

“That’s despite the SNP basing an entire campaign around the myth that a separate Scotland’s economy would be turbo-charged and sustained by oil and gas.

“People knew it was a nonsense then and, as this piece of evidence shows, it continues to be a nonsense almost a decade on.

“It shows once again that Scotland’s positive future is with the rest of the UK, pulling together in good times and bad for everyone’s benefit.”

A Scottish Government spokesperson said: “The UK is benefiting hugely from Scotland’s natural resources, with oil and gas receipts at near record levels and expected to raise over £21 billion this year and next.

“Our economy prospectus paper recognises that oil and gas production will decline over the longer-term and that such revenues are volatile.

“The Scottish Government has outlined plans to set up a dedicated Building a New Scotland Fund to invest up to £20 billion over the first decade of an independent Scotland to lay the foundations for a green, fair and net zero economy.”