Saturday, June 07, 2008

S&I Elsewhere - An Invisible Giant

Maybe unusually for an SNP economics anorak, I don't write all that often about the North Sea. However, with oil prices and the UK public finances as they are, and in the aftermath of this BBC Scotland documentary, it's an issue once more creeping up the agenda.

This was written for the Scots Independent newspaper a week or so before 'Truth, Lies, Oil and Scotland' was broadcast north of the border (It's on the BBC iPlayer for a few more days for anyone who missed it). In the event, the programme was no-where near as incendiary as its title. However, when you've been told as I have by middle aged oil workers that despite the decades of production to come from the North Sea and into the Atlantic, that there's a shortage of young people coming into the industry because they all think the oil's going to run out tomorrow, you begin to realise what a good job people did in the 70's and 80's of persuading Scots, against all the available evidence, that this was just a transient windfall.

The first 30 years of revenues have been peed up against the wall. The kneejerk reaction to Alex Salmond's call for just 10% of the current North Sea windfall (not 95%, not even a percentage of the total tax take) to be invested in an oil fund for Scotland, should tell us all we need to know about how important the resource, and its revenues continue to be to the UK Treasury. It should also tell us why so many of the British political classes are so opposed to Scottish Independence - the cheek of some in continuing to claim subsidy as an argument for Union while raking in the taxes, still takes the breath away.

An Invisible Giant


What is it about the oil industry that causes many otherwise sentient minds to shut up shop? To some, North Sea Oil has been about to dry up imminently for the past 30 years. To others, it would have been ‘selfish’ to see the revenues as being anything other than British. Some, meanwhile, prefer a zero sum view that because a resource is finite, no benefit can arise from its use.

Ill-informed negativity masquerading as insight and wisdom isn’t only a feature of Scottish politics, but with oil and gas, it seems to be the default position for many. Although the wealth brought by the North Sea is clear to anyone who works in the industry, its economic significance has routinely been played down, leaving many in Scotland with a false impression of how big the industry actually is.

Perhaps one of the reasons for this is because with one or two very obvious exceptions, the onshore signs of the industry are few and far between for the majority of Scots. It’s simply never become part of our iconography in the way that Ravenscraig or Clyde shipyards did – remarkable, when you consider that the offshore industry is worth something like a sixth of total Scottish economic activity.

[Scottish GVA without oil = 96% of UK GVA including oil. Scottish GVA including oil = c. 110% of UK GVA including oil]

Figures from the UK Offshore Operators Association show that in 2006, the industry invested more than £5.5 billion in the North Sea; spent a further £5.5 billion on operations; and contributed £9 billion in direct taxation to the Exchequer. It employed, either directly or indirectly, some 480,000 people across the whole UK – with 380,000 jobs related to domestic production and a further 100,000 to the export of oilfield goods and services.


That latter number is of particular significance to Scotland. Thanks to the experience gained over the past 40 years, Scotland is now a major provider of oilfield goods and services throughout the world, with exports growing at 10% per annum and worth some £4bn every year. Like financial services, this is another Scottish industry with a truly global reach.

But it's not just onshore that our visibility of this giant is restricted. When it comes to UK economic data, North Sea revenues are always included in overall UK accounts, but excluded from the Scottish accounts as 'Extra Regio'. This means that when a Scotland shorn of oil and gas revenues is compared with a UK figure which does include these revenues, Scotland is made to look relatively less prosperous than she actually is.

One of the most flagrant examples comes when measuring the size of the Scottish public sector. We’re often told that Scotland enjoys Scandinavian levels of public spending, yet pays only UK levels of taxation. The statistic used to back this up is that Scottish public spending exceeds 50% of GDP, while UK spending is sitting at 43% - a statistic from which we are then invited to believe, entirely falsely, that the Scottish public sector is uniquely inefficient and further, that Scottish public spending is being subsidised from elsewhere in the UK.

Let’s leave aside the fact that even if resources were being transferred to Scotland by the Treasury, present UK debt levels mean it would be being done with money borrowed internationally. Let’s also leave aside for a moment the fact that with 1/12 of the UK population being spread over 1/3 of the UK landmass, it’s always going to cost more to deliver the same quality of government services in Scotland than it would in more densely populated parts of the UK.

When you include the 90% plus share of North Sea revenues which would accrue to a Scottish Treasury, Scottish spending isn’t above 50% of GDP – it’s 41% - lower than the equivalent UK figure. In fact, pull the same stunt of removing those North Sea revenues out of UK accounts completely and the UK would have failed even to meet the Maastricht Eurozone convergence debt criteria from 2003/04 onwards.

It was in 1999 that the late Donald Dewar stood before the Scottish Grand Committee and intoned gravely that the $10 barrel of oil would be with us ‘for the foreseeable future’. Today, with greater competition for resources and increasing consumer demand, high energy prices and the challenges which flow look like they are here to stay. With our surfeit of renewables potential, and with as much to come from the North Sea as has already been extracted, Scotland is almost uniquely well placed to ride out the transition to this new world of energy insecurity.

We’re looking now to the second age of the North Sea, founded not on the prodigious rates of extraction of the early 1980's, but based on the high prices which make development of smaller resources worthwhile. However, the capital needed to maintain this success is both finite and highly mobile. To make the most of the remaining opportunities in the North Sea, government is going to have to focus on how to maintain an environment that makes Scotland at least as attractive to investors as other fields throughout the world.

Labour, with little or no affinity for the industry or those who work in it be they 'fat-cat' or 'roughneck', has only ever seen it as a convenient source of cash when the books won't balance. A Scottish Government could never afford to be so cavalier. This surely bodes better for the long-term future of the industry than the erratic behaviour of Whitehall debt junkies, desperate only for their next fix of corporation tax revenues.

7 comments:

Normal Mouth said...

The kneejerk reaction to Alex Salmond's call for just 10% of the current North Sea windfall...should tell us all we need to know about how important the resource, and its revenues continue to be to the UK Treasury.

Perhaps, though I tend to think it shows that the Scottish Oil Fund proposal lacks any form of rational or reasonable basis, amounting to a proposal to change the funding arrangements for the Scottish block, but without any reference whatsoever to the wider changes this would necessarily imply.

Jeff said...

Fascinating stuff Richard, thanks for sharing.

Richard Thomson said...

Cheers, Jeff.

NM - I don't think it'll come as a complete shock for anyone to learn that short of independence, the SNP would be quite happy to see the present funding arrangements done away with and for Holyrood to be given maximum fiscal autonomy.

As a mischievous aside, all Alex Salmond has laid claim to is for a pro-rata (almost) share of the additional revenues over and above the last budget forecast of £9.9bn from North Sea Corporation tax, PRT and the supplementary charge. In theory, there's nothing there which would prevent politicians elsewhere in the UK from making the case that in the absence of a UK-wide desire for an oil fund, that their nation/region should benefit similarly.

Ideas of Civilisation said...

Richard,

I thought this a very interesting post.

I agree with you that an oil fund would seem to be a sensible move - it simply does not make sense to fund everyday services with revenue which will run out in our lifetimes (well hopefully we're still here then!).

There is also the moral issue about one generation taking a natural and finite response and using it solely for their benefit. That alone supports the idea of an oil fund.

However I can't agree with the idea that this can happen solely for Scotland at present. I don't see how you can take one tax in isolation because of the logical conclusion of this e.g. the majority of financial services in the UK are located in London - could they demand a specific share of taxes raised from this? and so on...

Richard Thomson said...

IoC,

The logic of any kind of 'fiscal federalism' is that subject to transfers made for 'intra-regional solidarity', areas will be able to retain the greater part of the proceeds of their tax base.

London is maybe a special case when it comes to corporate headquarters and the resulting Corporation Tax liabilities. Boris will disagree, but you could argue that as the best funded region of England per head, the city does pretty well already. However, if you measure liability based on where the brass plates are located, then Edinburgh does pretty well too, with 3 out of the big 5 clearing banks being headquartered there on that basis.

There are precedents for sub-central governments having funds similar to the one proposed by the SNP. Alberta and Alaska to name 2. However, if the price of an oil fund is having to accept the responsibility of greater fiscal powers, or even independence, then I suppose that's just a cross I'll have to bear as best I can...

Shuggy said...

First off, while I don't favour independence, I don't take this view for economic reasons. I'm sure after some short-term dislocations, an independent Scotland would do perfectly well earning a living in the world.

Having said that, I do have a couple of points in relation to what you're saying here. For example:

Although the wealth brought by the North Sea is clear to anyone who works in the industry, its economic significance has routinely been played down, leaving many in Scotland with a false impression of how big the industry actually is.

People may well have a false impression of how big the oil industry is but I'm not sure it's for the conspiratorial reasons you allude to here. I don't know but I'd imagine that many people are similarly unaware of just how important agriculture and fishing is to Scotland. And I'm pretty positive - because I ask pupils all the time - that the majority of Scots are unaware of how important financial services are to the Scottish economy. Isn't it rather that many people are simply uninterested in economics? If I wanted to make a cheap point, I'd say that this is something that the former economist Alex Salmond rather plays to his advantage.

Then there's the public spending point you make:

present UK debt levels mean it would be being done with money borrowed internationally.

This is completely irrelevant since what is borrowed internationally has to, some day, be paid back domestically. But I have a wider problem with both Scottish and English nationalists with the way they, you, bang on about this sort of thing. Because it's just another way of saying you're a nationalist. But we knew this already. I, on the other hand, would not care a jot if Scotland turned out to be subsidizing the North of England, say, because I'm a unionist. I really feel all this who is subsidizing whom stuff cheapens the debate. Transfer payments are only a problem for nationalists and/or those who believe in a minimalist state. E.g. We’re often told that Scotland enjoys Scandinavian levels of public spending, yet pays only UK levels of taxation.

Told by whom? English nationalists probably. Why argue with them when what you have in common with them is more than separates you? I certainly would never make such an argument. You might as well say that Glasgow or Liverpool "enjoy Scandinavian levels of public spending, yet pays only UK levels of taxation". This happens because of relative poverty. You could even use this as an argument to support your case. As I'm sure you're aware, some nationalists do - which rather gives the impression of a somewhat inconsistent narrative when it comes to the whole business of nationalism and economics. Or is this unfair?

Richard Thomson said...

Thanks for the comment Shuggy.

People may well have a false impression of how big the oil industry is but I'm not sure it's for the conspiratorial reasons you allude to here. I don't know but I'd imagine that many people are similarly unaware of just how important agriculture and fishing is to Scotland. And I'm pretty positive - because I ask pupils all the time - that the majority of Scots are unaware of how important financial services are to the Scottish economy. Isn't it rather that many people are simply uninterested in economics?

No doubt much of that is true. My point is that when considering the contribution it makes, the accounting of North Sea revenues as ‘extra regio’ and the regular non-expert claims (in defiance of BERR statistics) that the industry has a short remaining lifespan, is likely to diminish the accuracy of our perceptions as to the longevity and significance of the industry.

Conspiratorial it may not be. It seems to be the way a lot of minds work, though.

Then there's the public spending point you make:

”present UK debt levels mean it would be being done with money borrowed internationally”.

This is completely irrelevant since what is borrowed internationally has to, some day, be paid back domestically. But I have a wider problem with both Scottish and English nationalists with the way they, you, bang on about this sort of thing. Because it's just another way of saying you're a nationalist. But we knew this already. I, on the other hand, would not care a jot if Scotland turned out to be subsidizing the North of England, say, because I'm a unionist. I really feel all this who is subsidizing whom stuff cheapens the debate. Transfer payments are only a problem for nationalists and/or those who believe in a minimalist state. E.g. We’re often told that Scotland enjoys Scandinavian levels of public spending, yet pays only UK levels of taxation.

Told by whom? English nationalists probably. Why argue with them when what you have in common with them is more than separates you? I certainly would never make such an argument. You might as well say that Glasgow or Liverpool "enjoy Scandinavian levels of public spending, yet pays only UK levels of taxation". This happens because of relative poverty. You could even use this as an argument to support your case. As I'm sure you're aware, some nationalists do - which rather gives the impression of a somewhat inconsistent narrative when it comes to the whole business of nationalism and economics. Or is this unfair?


Yes. It is unfair.

I was refuting 2 specific points which have, sadly, seem to have become commonplace: First, that Scottish public spending is as high as 50% of GDP, which is complete nonsense and distorts sensible debate about the role of the state in Scotland (it’s also advanced by plenty of Scots). Secondly, that any shortfall of revenue over expenditure in Scotland would automatically be covered, as many assume, from taxpayers elsewhere in the UK. It wouldn’t.

Neither of these are particularly ‘nationalist’ points – they are simply points of fact which deserve to be made. You might not make the ‘Scandinavia’ point, being yourself of the left, but there’s plenty others who would describe themselves as British unionists/British nationalists on both sides of the border who regularly do just that. As an example off the top of my head right now, how about Bill Jamieson, a grand fromage at The Scotsman, who seems to get a regular gig discussing such matters on Newsnight Scotland?

For what it’s worth, I agree that discussions about who subsidises whom can be rather cheap. However, there are many who peddle a ‘subsidy’ argument as a reason why further constitutional change would be undesirable. Some may believe it sincerely, others may repeat it because they think it’s a sensible or clever point to make. However, it distorts and diverts sensible debate and for so long as the ‘you canny afford it’ argument remains in the minds of some people, then people like me are going to tackle it so that we can then try to advance our central argument on its actual merits.

As for ‘transfer payments only being a problem for nationalists’, I beg to differ. Have a read of what an ostensible Unionist like Graham Stringer MP (Lab, Manchester Blakely) has to say on the subject of the Barnett Formula. There was also a very instructive (politically rather than economically) little debate in Westminster Hall on the subject a few months ago. Now, having spent the past year living and working in London, I know that most people are not as exercised as journalists or politicos on this subject, but this is the sort of background hum which is ‘informing’ the debate outside Scotland:

http://www.publications.parliament.uk/pa/cm200708/cmhansrd/cm071121/halltext/71121h0006.htm#07112172000002

Finally, not that I’m an Observer reader, but back in January 2007, Ruaridh Nicol had an article about the union which I quite enjoyed. After what I thought was a reasonably balanced article, someone had tagged the following on to the end:

The Union in numbers

• In the late 1970s, Joel Barnett devised a system known as the Barnett formula, which Whitehall uses to allocate public spending to the devolved authorities in Scotland, Wales and Northern Ireland. Scotland gets a fixed quota of 10 per cent of money available for public services.

• In 2006, public spending per head in England was £6,762. In Scotland, it was £1,503 more, at £8,265.

• Every Scot is 'worth' 20 per cent more than his English counterpart.

• The cost of the Scottish Parliament building was 10 times over budget at £431m.

• Wendy Alexander, convener of Holyrood's finance committee, dismissed SNP claims that an independent Scotland could rely on North Sea oil, saying the country would have suffered a deficit of £7bn in 2005 because of unstable oil prices.

• Scotland's revenue in 2005 was £36.4bn, but its total spending was £47.7bn. However, the SNP claimed that with oil revenues taken into account, Scotland had a surplus of £560 a head.


Given the previous 5 bullet points, is really all that surprising that those of a pro-independence bent seeking to make their arguments might respond with the 6th?

Regards,

Richard