credibility@ (Adds Sturgeon quote)
EDINBURGH, Aug 23 (Reuters) - Scotland's budget deficit narrowed in the year to March but, potentially hampering arguments for Scottish independence, the gap remained more than triple the size of that for the United Kingdom as whole.
Scotland's heavily oil-dependent economy is struggling to cope with an oil sector downturn following a peak in prices in 2014, tax cuts for the industry and lower production, as well as a longer legacy of high government spending.
The budget deficit, including a share of North Sea oil revenues, was 8.3 percent of GDP in the 2016/17 tax year or 13.3 billion pounds ($17.0 billion), down from 9.3 percent in 2015/16, Scottish government data showed on Wednesday.
That compares with a deficit of 2.3 percent of GDP in the UK as a whole.
"We are seeing an improving picture in Scotland's economy, although there are still big challenges to be overcome," pro-independence First Minister Nicola Sturgeon told reporters.
The data were not a prediction of the economy in an independent Scotland, she said, but acknowledged that were Scotland to secede public finances would still be in deficit.
"This reflects Scotland's position under current constitutional arrangements. Of course, if Scotland is independent, getting that deficit down to sustainable levels would be the responsibility of an independent Scottish government, with the challenges which are inherent in that."
The numbers included the first rise in North Sea revenue since 2011, proof of partial recovery for the sector as oil prices rose from an 11-year low struck in early 2016.
Clouding the horizon, however, are doubts around Britain's decision to leave the European Union and what that will do to Scotland's economy, which represents about 8 percent of the UK as a whole.
"The big risk we face for the medium to long term, in common with the rest of the UK, is the challenge that Brexit poses to that picture of recovery," Sturgeon said.
Scotland voted to keep Britain in the EU, increasing tensions with the UK government over the deal it must negotiate with the EU and putting the UK's four-nation union under strain.
Spending per head for Scotland is higher than for the UK -- by around 1,400 pounds per person -- boosted by more spending on health, education and economic development.
On the revenues side, Scotland raises slightly less than the UK per head in tax, by about 300 pounds per person.
"I make no apology for spending decisions we make, you don't have to look very far to see the damage that is being done to lives because of the austerity agenda," Sturgeon told reporters, referring to policies taken in London.
Scotland's budget deficit has exceeded 7 percent of GDP every year since 2009/10 -- a period of borrowing that an independent country might find hard to finance -- while Britain has reduced its deficit from 10 percent to just over 2 percent.
Britain's Scotland minister, David Mundell, said the figures were "a cause for concern".
"Being part of a strong UK has protected our living standards, and that's one reason the people of Scotland clearly rejected Nicola Sturgeon's plan for a second independence referendum at the (June UK-wide) election."
Sturgeon's Scottish National Party lost seats in Westminster on June 8, although it still holds a majority of the Scottish seats in the UK parliament.
($1 = 0.7817 pounds) (Reporting by Elisabeth O'Leary Additional reporting by David Milliken; Editing by Jermey Gaunt)