Press Releases

NATURAL RESOURCE TAXATION AND SCOTTISH DEVOLUTION

A report published today confirms the technical feasibility of assigning North Sea tax revenues to the Scottish Parliament but shows this would change the current financial relationship between Scotland and the rest of the UK.

Speaking in Edinburgh today, Professor Anton Muscatelli presented a report by the Independent Expert Group convened last year to provide impartial advice and evidence to support the Commission on Scottish Devolution. The group comprises experienced and pre-eminent academics and practitioners from the UK, Europe and North America.

Professor Muscatelli, who is Principal and Vice Chancellor of Heriot-Watt University, said,

“Tax revenues from North Sea oil and gas have been a subject for debate since the first oil was brought ashore in the 1970’s. The initial attractions of adding these revenues to the Scottish budget is plain to all, but our report highlights a number of further considerations.

“It would be relatively straightforward to accurately estimate and assign a Scottish share of North Sea tax revenues, although devolving North Sea taxation powers would be problematic.

“North Sea oil and gas is a finite resource, exploiting it now means it will not be available to future generations. This is why established economic theory states that a proportion of these tax receipts should be either invested or spent only on long term capital investment, as happens in a number of countries other than the UK.

“In many countries around the world, tax revenues from natural resource exploitation are shared between regional and central governments based on the derivation principle which allocates revenues on the basis of the geographical source of the oil. This most frequently happens in countries with federal systems of government where a range of taxes are often shared between layers of government and is in contrast to the United Kingdom’s very centralist model of fiscal control. This has not changed since the creation of the Scottish Parliament which has little tax raising power with the Scottish budget deriving from a block grant from the UK Government.

“The derivation principle would justify assigning North Sea tax revenues to the Scottish Parliament but would also imply a significant change to the constitutional relationship between Scotland and the rest of the UK. It could have major implications for the Scottish budget as it might be associated with a reduction in the block grant from the UK Government.

“Oil and gas revenues are highly volatile as they depend on the price of an internationally traded commodity. If these receipts were to be assigned, the Scottish Parliament would need substantive new powers to manage these fluctuations, as well as being able to invest a proportion to help prepare the economy for the time when the oil is depleted.




Notes for Editors

1) The report is published by Heriot-Watt University on behalf of the Independent Expert Group supporting the Commission on Scottish Devolution. Further copies are available from Caroline Dempster of Heriot-Watt 0131 451 3443.


2) Membership of the Independent Expert Group
Members based in the United Kingdom
• John Aldridge, former Finance Director at the Scottish Executive
• Professor David Bell, Professor of Economics, Stirling University
• Professor Julia Darby, Professor of Economics, University of Strathclyde
• Dr Sandra Eden, Senior lecturer in Tax Law, Edinburgh University
• Professor Clemens Fuest, Professor of Business Taxation and Research Director of the University of Oxford Centre for Business Taxation, Oxford Said Business School
• Professor Charlie Jeffery, Professor of Politics, Edinburgh University
• Professor Alex Kemp, Schlumberger Professor of Petroleum Economics, University of Aberdeen
• Professor Iain McLean, Official Fellow in Politics, Nuffield College, Oxford, and Professor of Politics, University of Oxford
• Professor Anton Muscatelli [Chair], Principal and Vice-Chancellor Heriot-Watt University
• Jeremy Peat, Director of the David Hume Institute; former Group Chief Economist at the Royal Bank of Scotland and a former economic adviser at HM Treasury and the Scottish Office
• Professor David Ulph, Professor and Head of School of Economics and Finance, St Andrews University, former Director of Analysis at HMRC.

Members based Overseas
• Professor Robin Boadway, Professor of Economics Queen's University, Kingston Ontario Canada
• Professor Andrew Hughes-Hallett, Professor of Economics and Public Policy, George Mason University, Virginia, USA; Professor at St. Andrews University School of Economics and Finance.

3) The remit of the independent expert group is:
To provide expert advice to the Commission on Scottish Devolution on improving the financial accountability of the Scottish Parliament in terms of the Commission’s overall remit:
"To review the provisions of the Scotland Act 1998 in the light of experience and to recommend any changes to the present constitutional arrangements that would enable the Scottish Parliament to serve the people of Scotland better, that would improve the financial accountability of the Scottish Parliament and that would continue to secure the position of Scotland within the United Kingdom."
To assess the strengths and weaknesses of the present system of financing devolved expenditure (in respect of financial accountability and otherwise), and any alternative fiscal options which might provide improved financial accountability.
In particular, this includes considering the potential costs and benefits to Scotland of any alternative system, and the issues of equity and the economic and fiscal consequences for Scotland and to the UK as a whole.
4) A working relationship between the independent expert group and the Commission on Scottish Devolution has been agreed which confirms its independence and impartiality. Specifically, it has been confirmed that:
The Expert Group - as the provider of impartial advice and evidence - is independent from the Commission itself.
It may subsequently publish work completed for the Commission although it is anticipated that much of the work of the expert group will draw on existing research in this area and hence would already be in the public domain.
The expert group may submit advice and evidence on matters it considers to be relevant to its agreed remit, in addition to meeting the stated informational requirements of the Commission as expressed by its Financial Accountability Task Group.
5) Members of both the Commission on Scottish Devolution and the Independent Expert Group are unpaid.