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Opinion: Budget leaves UK oil industry on the brink

George Osborne holds his ministerial red box up to the media
George Osborne holds his ministerial red box up to the media

Prior to the last general election, George Osborne would have scoffed at the possibility of being able to deliver the first Conservative budget in two decades.

The complete collapse of Labour in Scotland and of the Liberal Democrats throughout the UK enabled him to be in this position.

With respect to Scotland in general and Aberdeen in particular there should have been recognition of the economic impact that the declining revenues from North Sea oil will have on the economy of the country.

The Chancellor could have acted to relieve the industry completely on an interim basis from its punitive tax regime. One solution would have been to treat the oil industry like every other UK industry and have it pay corporation tax at 20%. The concession to broaden out the base for allowances already agreed fall far short of what the oil industry requires to survive in the current climate.

Given the sharp fall in oil price few companies in the North Sea are paying tax and hence it would have been a relatively inexpensive way of signaling to the industry that it should sit out the current problems facing it. The alternative for the industry is to start a potentially catastrophic decommissioning phase with huge job losses across the UK.

Other economic activity in Scotland would be adversely affected by the demise of the oil industry. Given the Smith Commission’s devolution of some tax and welfare powers to Scotland with a consequent reduction in the Barnet formula funding to Scotland the loss of a significant part of its economic base is of real concern to Holyrood. The Chancellor’s jibe to Holyrood to start using the toxic devolved powers reveals his recognition of this situation. Such an attitude also explains why the Conservatives are a spent force in Scotland.

The Conservative Party manifesto helped win the election by promising no increases to income tax, VAT or national insurance for the next five years. That said, the Chancellor had ambitiously stated that he would run a budget surplus in “normal times”, albeit without defining what that meant.

Are times ever “normal”? Prior to the speech it could have been conjectured it might have meant a pledge to reduce the national debt in absolute terms at the end of five years? If so, his place as the most successful Chancellor in modern times would be guaranteed.

In practice it is now seen to mean that the rate of decline in the UK deficit observed in the last parliament will continue over this parliament and only in 2019/20 will it move to a genuine budget surplus. So “normal” is five years away. In addition, this goal means austerity will continue and, in the absence of tax increases, the UK should expect more cuts to public spending.

Indeed spending cuts feature prominently in the Chancellor’s speech. As expected, welfare spending will be reduced by £12billion over the next three years by cuts to tax credits, housing benefits and welfare caps. Detecting and penalising users of offshore tax avoidance schemes were highlighted as a means of reducing the deficit and this should be welcomed.

However, there must be questions asked why such tax avoidance schemes by the highest paid sections of society were allowed to become endemic in the first place. Who should now be held to account for such a situation? Would such tax abuse by low earners have been summarily stopped and court action taken against the offenders?

Other areas of public spending are also under financial pressure. The Chancellor is seeking better more efficient ways of doing things with public funds. However, the political hot potato of the NHS has been guaranteed additional funding. This is reassuring but must now put funding for other public funded services such as education and policing under severe pressure to make efficiency savings in all their activities.

The BBC have to reduce their spending by assuming responsibility for meeting the £650 million cost of free TV licenses for people over 75. The underlying mantra here is that the UK must increase its productivity.

Perhaps the biggest omission and disappointment of the budget is that a chance has been lost to try and eliminate the inequalities that exist across and within regions of the UK. If anything the difference between the have and have-nots will increase as a consequence of the budget. This is illustrated vividly in the proposal to increase the inheritance tax threshold to £1 million.

Possessing £1 million properties in London may be a commonplace event but not for people outside London. No attempt has been made to move the economic base of the UK from London and out to more Northern areas. The London-centric view of the Conservative Party is the biggest source of social division and inequality in the UK. Every effort should be made to spread economic activity beyond London and that means moving jobs and people away from the capital. The replacement of student maintenance grants with loans is a direct assault on the capability of youngsters from lower and middle class backgrounds to go to university.

The Chancellor’s parting shot was to promise the introduction of a national living wage starting at £7.20 an hour and rising to £9.20 by the end of five years. This will put pressure on employers in economically challenged regions of the UK; London will again be better placed to accommodate this change.

Alex Russell is Professor of Petroleum Accounting at Robert Gordon University, Peter Strachan is Professor of Energy Policy at Robert Gordon University

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