The curious case of the SNP-friendly economist and a mix up on oil
There is a curious letter in today’s FT from Prof Andrew Hughes Hallett, a Member of the SNP-run Scottish Government’s Fiscal Commission, and thus someone one might hope knew a thing or two about taxes.
Prof Hughes Hallett’s letter notes that, according to the official Scottish national accounts figures, North Sea revenues fell 99 per cent between 2014 and 2016, despite North Sea output rising 15-20 per cent. He alleges that this is because of flaws in the national accounting methodology and a failure to apply international best practice, stating: “one thing is certain — these accounts do not conform to the United Nations Convention on National Accounting or the European System of National Accounts.”
He goes further, likening the situation to an accounting scam he claims occurred at his own university. That sounds like a pretty serious allegation, on the face of it. Could Scottish taxpayers be being deprived of hundreds of millions or even billions of pounds in revenue or lower taxes because of an accounting scam affecting the Scottish national accounts?
Fortunately the truth is rather more prosaic, though not necessarily as unfavourable to the SNP’s case as to that made in the Professor’s…infelicitous…letter. North Sea revenues are set out in the Scottish Government’s “Government Expenditure & Revenue Scotland 2015-16” report, from August 2016. In Table 2.1 there we see that total North Sea Revenue to the UK did indeed fall from £4.8bn in 2013/14 to just £76m in 2015/16. But that was not because of some national accounting scam. It was because of a combination of lower profits and cuts in taxes.
Prof Hughes Hallett himself notes that oil prices fell around 54 per cent over the period, but asks “What…happened to the missing 45 per cent?”, referring to the difference between the 99 per cent number for the drop in revenues and the 54 per cent number for the drop in prices as if there were some connection between these two figures. Since there is actually no interesting connection between these two figures, the good professor’s question is almost as eccentric as if I noted that my height is 92 per cent of that of Dwayne Johnson’s, then asked “What happened to the missing 38 per cent?” difference between our height ratios and the drop in oil prices.
North Sea tax revenues come from taxes imposed on profits, not prices or company revenues. Specifically, they come from corporation tax (a tax all companies pay on their profits) and “Petroleum Revenue Tax” (a special profits tax levied on oil and gas companies). When the oil price falls, oil company profits fall. So corporation tax revenues from the North Sea dropped from around £3.5bn in 2013/14 to just £0.5bn in 2015/16.
But that is not the only thing that has happened, and here is where the story is (marginally) more SNP-friendly. North Sea revenues haven’t fallen only because oil companies are making less profits at lower oil prices, but also because the UK government has chosen to cut tax rates.
Specifically, Petroleum Revenue Tax (PRT) was cut from 50 per cent to 35 per cent in the March 2015 Budget. PRT was cut to 0 per cent in the March 2016 Budget, with the so-called “Supplementary Charge” being cut, as well, in March 2016 to 10 per cent.
However, these cuts wouldn’t affect the 2015/16 revenues. The upshot is that companies won’t be paying PRT in the future but can still claim back PRT refunds on current losses and decommissioning costs. That meant PRT revenues were negative in 2015 (by around £0.5bn) and will be negative hereafter.
Thus, North Sea revenues have not fallen because of some weird national accounts scam. They’ve fallen because, at lower oil prices, firms are making lower profits, and because the UK government has chosen to cut oil taxes.
For what it’s worth, my guess is that Prof Hughes Hallett probably didn’t mean to imply he thought North Sea taxes were taxes on oil prices and may also not have meant, quite, to allege that the Scottish government’s national accounts involve an accounting scam. Perhaps next time he should check the final wording of letters printed in his name a little more closely?