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02/10/13 09:12

Scotland’s Oil Fund to ‘be established on independence’

First investments could be made as early as 2017/18.

Finance Secretary John Swinney today welcomed the second report from the Fiscal Commission Working Group.

The Working Group’s report on Stabilisation and Savings Funds for Scotland sets out a framework that will 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 Working Group recommends that both a short-term stabilisation fund and a long-term savings fund should be established immediately following independence.

Under the criteria suggested by the Fiscal Commission it is likely that the first investments into the savings fund could be made by the end of the decade and perhaps as early as financial year 2017/18.

The economic rationale for establishing such funds is powerful and they have been successfully implemented in the vast majority of natural resource rich countries, with the UK being a notable exception.

Welcoming the report on behalf of the Scottish Government Finance Secretary John Swinney said:

“I’m grateful for the significant amount of work that has been undertaken by the experts on the Working Group to develop this report. Their work highlights the significant opportunities that Scotland’s oil and gas wealth presents and answers the key questions that have been raised about how this wealth should be managed in an independent Scotland.

“The report recommends that the government of an independent Scotland establish both a short-term stabilisation fund and a long-term savings fund, immediately following independence.

“Firstly, the Working Group have outlined how a stabilisation fund, into which higher than forecast oil and gas revenues are deposited, would minimise North Sea revenue volatility from changes in oil prices. Secondly, the report also sets out how an independent Scotland could invest in a longer-term savings fund to ensure that Scotland’s oil wealth provided a lasting benefit to the country.

“The purpose of the two funds is different. The stabilisation fund provides the mechanism for smoothing out the fluctuations in oil and gas prices. For example, the Scottish Government Oil and Gas Analytical Bulletin made forecasts for 2017/18 based on an oil price of $113 dollars a barrel. However a range of forecasts have been published. For example the UK Department of Energy and Climate Change and OECD are at the higher end, forecasting around $130 and over $150 respectively by the end of the decade.

“Under the Fiscal Commission Working Group proposals, if the oil price is higher than forecast, then the additional revenues are placed in the stabilisation fund, which is then used in years when the forecasts are undershot.

“The report also sets out criteria for establishing a long-term savings fund and crucially recommends that this should not necessarily wait until public revenues exceed total public spending. It makes clear there is merit in establishing and investing in such a fund when borrowing is manageable and debt is on a downward path as a proportion of national wealth.

“For example, this could be achieved when the overall deficit moves below three per cent of GDP or when the economy moves into current budget surplus, i.e. a surplus in current revenues and spending excluding capital investment.

“The analysis in the paper shows that since 1980-81 Scotland has run an average annual net fiscal surplus of 0.2 per cent of GDP compared to an average annual deficit for the UK of around three per cent of GDP. If these resources had been invested into a savings fund then the country could now have accumulated financial assets of between £82 billion and £116 billion, as opposed to a share of the UK’s huge debt.

“However the paper does more than analyse the missed opportunities from the past. It sets out a structure on how to make the most of opportunities to come, pointing out that we are still less than half way through the likely wholesale value of oil assets to be extracted from the North Sea.

“The report recommends that a savings fund should be established immediately following independence although it recognises that Scotland will inherit from the UK a challenging fiscal position .

“However, Scotland’s fiscal position will strengthen with economic recovery, and could be below a three per cent deficit by 2017/18. This would allow an independent Scotland to consider investing modest sums into a long term savings fund without an offsetting change to public spending or taxation.

“In the long run, the economic levers available under independence will enable us to grow the Scottish economy more quickly and thereby boost tax revenues. Our ambition is therefore that , in time, a greater proportion of Scotland’s oil and gas wealth be invested for the future as the country moves towards fiscal balance.

“Norway provides a good example of how a country can effectively manage its oil and gas revenues. Norway established its oil fund in 1990, the first net investment was modest and not made until 1996. The fund is now the largest sovereign wealth fund in the world, worth around £470 billion. It currently owns, on average, 2.5 per cent of every listed company in Europe, and 1.2 per cent of the world’s listed companies. These investments have achieved average annual returns of 5.9 per cent over the last five years.”

Notes to editors

This is the second report from the Fiscal Commission Working Group.

The Working Group’s first report set out a series of recommendations and proposals for the Scottish Government to consider when designing a macroeconomic framework for an independent Scotland.

The Fiscal Commission Working Group report is available at:

http://www.scotland.gov.uk/Publications/2013/10/7805