Source: Government Expenditure & Revenues in Scotland 97/98 – 03/04

It reveals that in every one of the last 7 years for which official figures are available public expenditure in Scotland exceeded receipts – a Union Dividend rising from £5bn to over £11bn.

Do oil revenues match this Union Dividend? The table reveals that not once in recent years did oil revenues come even close to doing so.

Even assuming all oil proceeds accrue to Scotland (which they dont) an independent Scotland would be facing a large annual deficit – £7bn on the most recent figures. (And this is before meeting any additional costs associated with the setting up of a separate Scottish state.)

Which logically begs the question – what cuts would the SNP have made to cover this Union Dividend gap since 1999?

Of course this is something the SNP does not want to discuss. Scandinavian “fact finding missions” are designed to divert attention – and not address the real issues. But these issues lie at the heart of why the SNP’s economics and finances have never stacked up, and still don’t.

The SNP are reluctant to accept recent budgetary trends. Instead they tend to produce optimistic “forecasts” for the future.

This summer they published just such a forecast for the current financial year 06/07, “Scotland in Surplus”. This document is a far cry from 1999, when Alex Salmond pretended that Scotland had no non-oil deficit at all. In their latest forecast they finally concede that without oil Scotland would have a substantial deficit, amounting to £10.6bn this year.

For the SNP admitting a £10bn plus non-oil deficit – or Union Dividend – is progress of sorts.

But the SNP still claim oil revenues would cover it all and so put “Scotland in Surplus”. Hence they massage away the deficit by first assuming a $65pb oil price, then one of $70pb.

But what has been happening in the world of oil?

• The price has fallen this year by over 25% since its summer peak.
• The Norwegian government’s own estimate of the long-term future price of oil is $50 a barrel.
• Scottish oil economist Alex Kemp, often quoted by Mr Salmond in the past, uses a long term central price estimate of as low as $30 a barrel, and a high forecast of $40 a barrel.

So, updating the SNP’s own Budget forecast using: either the more recent oil price or the future oil price as estimated by the Norwegian government; or by Professor Kemp, would result in an on-going deficit.

Clearly the rosy scenario of surplus’s to come is a figment of Alex Salmond’s fertile imagination.

Granted the oil price is notoriously difficult to predict. But we do have past trends which demonstrate its extreme volatility.

Table 2 outlines the inflation adjusted oil price data for the last decade.

Table 2

Source BP

The SNP need to demonstrate that oil revenues can match the Union Dividend in all years not just those where oil revenues might peak.

Their summer Scottish surplus relied on both under-estimating the likely deficit and then assuming an oil price of $65 a barrel.

In August Alex Salmond rushed out an update based on the temporarily higher figure at the time of $70 a barrel.

Since the oil price fell back to $60 or less there has been no update from the SNP on the effect this would have on Scotland’s public finances.

What would the SNP do at these lower oil prices?

They would be constrained in terms of the size of the deficit they could run by EU rules, which is 3% of GDP. On the latest data Scotland’s deficit (including 90% of oil revenues) is more than double that figure at 6.8%.

The deficit would have to be cut either by raising taxes or cutting spending, or both. The SNP maintain they wont lower taxes. So that means large cuts in public spending. To give a sense of the scale of cuts required, a reduction in the deficit to 3% would require a cut amounting to more than half the total Scottish Health budget.

So instead of the Union Dividend,under the SNP the future quantity and quality of Scotland’s public services would be dependent on shrinking oil revenues, subject to the vagaries of the international oil price.

Moreover Scotland’s oil reserves are in decline. This brings me to another piece of SNP wishful thinking. Alex Salmond talks of 38.7bn barrels of oil left in the North Sea. In fact the DTI’s central estimate is for 21.1 bn barrels, a figure consistent with the latest estimate by Professor Kemp.

In short Alex Salmond has exaggerated oil prices. He has exaggerated reserves. And he understates the size of the deficit.

All this begs a further question: where does Alex Salmond get his £90bn Oil Fund from when oil revenues are insufficient even to cover the deficit?

The reality is that with the SNP Scottish public services are at serious risk. Not through deliberate cuts as in the past under the Tories, but through Alex Salmond’s self-delusion.

Wishful thinking is no substitute for the facts. And when the facts are examined in the light of the hardnosed realities of international economics, the Union Dividend is a much secure basis for Scotland’s future prosperity.

The larger question for Scotland is why it would abandon a demonstrable Union Dividend, which the SNP now largely accepts, for a risky bet on unpredictable oil revenues.