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Gray: tough times to continue despite gas income

SIC head of finance James Gray.

INCOME from the oil and gas industry will help Shetland Islands Council to offset an expected £6 million-plus drop in Scottish government funding over the next five years, according to a new report.

But the local authority’s finance chief James Gray, whose latest financial plan goes before the newly created policy and resources committee on Monday, is warning that the tough spell for public spending in the islands is far from over.

The council is on course to be in a position to agree its first sustainable budget since the 1990s in 2015/16. Gray’s 41-page report predicts that Scottish government funding will slide from £85.7 million to £79.1 million between now and 2019/20.

That deficit will be plugged by an estimated £7-8 million from the new Total gas plant and increased harbour revenue from 2015 onwards amid a continued energy boom.

When the behind-schedule gas plant is fully up and running Gray estimates the council will harvest just under £3 million a year in the final four years of this decade. In the same time period profit from the council’s harbour operations is likely to be around £5 million a year.

But with previous councils’ habit of raiding the oil reserves to fund services set to become a thing of the past, once inflation and other budget pressures are accounted for the SIC still faces a considerable real terms cut in spending.

Gray outlines his view that a figure of around £10 million a year represents a “sustainable” draw on reserves, now worth just over £200 million after a drastic 60 per cent depletion in value since 2000.

That decline has now been arrested, but had the books been balanced at the turn of the millennium, when the oil fund was worth £500 million at today’s prices, the SIC could now be spending an extra £15 million a year on services and projects.

When the current batch of councillors took office in 2012 there were warnings that, with a spending deficit exceeding £30 million, the SIC was in danger of busting its reserves entirely.

Council leader Gary Robinson says income from Total's gas plant is likely to be lower than previously anticipated.

That is no longer viewed as a likely outcome even if some of the remaining savings being sought – most notably from a controversial programme of school closures – do not materialise this side of the May 2017 elections.

If the budget reaches sustainability in 2015/16 it will be a year ahead of schedule, but council leader Gary Robinson cautioned against any slow-up in meeting savings targets.

It was important to be “ahead of the game”, he said, “given that we know there’s going to be further reductions” in the budget handed down from Holyrood.

Gray forecasts that, with some ups and downs in between, overall spending on the council’s general fund will only fall slightly – from £110.7 million this year to £108 million come 2019/20.

However his updated “medium term financial plan” emphasises that the council faces nearly £4 million of “cost pressures” in 2015/16.

The biggest of those is an anticipated two per cent pay rise for staff this year, which would cost £1.75 million.

Robinson said that after a succession of pay freezes and one per cent rises the council was aware that there will be pressure for a better deal for employees this year.

“We’re keeping a close eye on activity in the private sector,” he said, “as are the trade unions I’m sure, and the pressure for wage increases is growing.”

Other spending pressures include around £1.25 million if the SIC agrees to borrow its £14 million, one-third share of building the new Anderson High School; over £500,000 of inflation in the cost of running bus, air and ferry services, and around £300,000 in demographic pressures to cope with an ageing population.

The deal with Total was struck during the last council. Robinson said the SIC’s income was likely to be lower than anticipated with fracking and shale bringing down the price of gas globally and slowing the pace at which gas from around Shetland is extracted.

But he felt that may not be bad news in the long term “because if throughput is lower at the start, all the gas will still have to come out at some point”.