The UK Office for Budget Responsibility has a fascinating simulation about the impact on Scotland’s finances of the fall in the oil price. Tax revenues would have fallen to a quarter of the 2016-2017 forecast made at the time of the referendum. Scotland would have looked at a much larger deficit in 2016/7 than the rest of the UK if it had been independent.
The report is interesting for a number of reasons, obviously the questionable nature of the forecasts provided to the Scottish people during the Independence referendum by the Yes campaign is clear. The likely impact of these forecasts is that the balance clearly shifts to the need for the UK to support Scottish public spending given the unreliability of oil tax revenues (and this ignores the negative impact of a transition to a lower carbon economy on those revenues). It will be interesting to see whether the utopian forecasts of self-sufficiency are resurrected by Nationalists in the future? Apparently the Scottish first minister thinks the current oil price is merely a blip and that oil prices will rebound – one assumes she is buying oil futures if she believes this?
But there is a wider significance to this issue demonstrated in Scotland, and this significance affects non commodity sector taxpayers as well. States with a large contribution to their revenues from commodities will be looking at a significant shortfall in tax revenues while commodity prices are low but that shortfall will not be matched by a fall in previously planned public spending. These states will need to look at a combination of public borrowing and revenue from non-commodity sector sources to fill this gap. The likelihood is that countries like Australia, Canada, Mexico and Russia in the OECD will look to tighten up their taxing rights and audit practices on non-commodity sector taxpayers to meet these revenue shortfalls from lower commodity prices (due to its planning Norway does not appear to fall into this category).
In the Developing World the impact will be more dramatic given that the importance of commodity taxation to government spending is more widespread. Equally, countries such as Brazil will face a significant down turn in tax revenues (iron ore has fallen more dramatically than oil).
While there has been comment about the benefits of an oil price fall on growth, the law of unintended consequences means that some non-commodity sector taxpayers will suffer impacts from governments which need to rebalance their revenue sources and fund their expenditure promises, either through new taxation or through tougher enforcement of current taxation. In these circumstances it is likely that a tougher stance will be taken on the BEPS agenda as the affected countries will push for both action on perceived abuses and the extension of taxing rights to address these fiscal shortfalls.