Fiscal Commission Working Group ... - The Scottish Government

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Fiscal Commission Working Group Stabilisation and Savings Funds for Scotland

Fiscal Commission Working Group Stabilisation and Savings Funds for Scotland

The Scottish Government, Edinburgh 2013

© Crown copyright 2013 To view this licence, visit http://www.nationalarchives.gov.uk/doc/opengovernment-licence/ or e-mail: mailto:[email protected] [email protected] This document is also available from our website at www.scotland.gov.uk. ISBN: 978-1-78256-968-8 The Scottish Government St Andrew’s House Edinburgh EH1 3DG Produced for the Fiscal Commission Working Group by APS Group Scotland DPPAS14907 (10/13) Published by the Scottish Government, October 2013

Contents Foreword: Crawford Beveridge ........................................................................ 3 Fiscal Commission Working Group Membership ............................................. 7 Executive Summary .......................................................................................... 9 1. Introduction and Overview ........................................................................ 15 2. The Oil and Gas Sector ............................................................................... 19 3. Scotland’s Public Finances.......................................................................... 26 4. Theory and International Evidence ............................................................ 31 5. Options for Managing Scotland’s Oil Wealth .............................................. 53 6. Conclusions and Recommendations .......................................................... 71 Annex A – Scotland’s Historic Fiscal Position ................................................. 77

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Foreword: Crawford Beveridge It is a privilege to present the second report by the Fiscal Commission Working Group to Scottish Ministers.

This report considers how an independent Scotland could most effectively manage the tax revenue received from oil and gas extraction.

The oil and gas industry has made a significant contribution to Scotland’s economy for four decades and will represent a valuable asset in the future.

This report sets out how both a short term stabilisation fund and a long-term savings fund could be incorporated into the fiscal framework of an independent Scotland. This could help to maximise the economic opportunity that Scotland’s oil and gas wealth presents and ensure that it provides a lasting benefit for future generations.

The economic rationale for establishing such funds is clear and they have been successfully implemented in a number of countries. They can help manage short term fluctuations in tax revenue caused by temporary shocks to commodity prices or production levels. They can also ensure that the depletion of a country’s finite natural resources is at least partially offset by the accumulation of financial assets which can provide a lasting benefit for future generations. There is a strong case for an independent Scotland to establish such funds as part of any post-independence fiscal framework.

As in any country, the government of an independent Scotland will face a range of competing priorities in managing its public finances. It would therefore have to balance investments into such funds, alongside wider decisions regarding levels of public spending and taxation.

This report focuses on the design of a stabilisation fund and a savings fund in an independent Scotland. In doing so, it sets out a clear and credible framework which could 3

be established immediately following independence to build flexibility into the budgetary process and help promote long-term macroeconomic stability.

The Working Group has been conscious not to specify the level of investment that should be made into either fund as this would be for the government of the day and democratic decisions relating to the public finances and taxati