Scottish independence: Explain your oil fund, expert tells Alex Salmond

By EDDIE BARNES
Published on 24/02/2012 00:00

THE SNP Government should set out how it intends to pay for its proposed £1 billion a year oil fund prior to holding a referendum on independence, the country’s most respected economist on the North Sea economy has said.

Alex Kemp, Professor of Petroleum Economics at the University of Aberdeen, said the SNP should offer the public a clear idea of how the proposal could be afforded in an independent Scotland, in the run-up to their proposed 2014 vote.

His comments come a day after a report by a separate think-tank, the Centre for Public Policy and the Regions (CPPR), suggested that either spending cuts or increases in borrowing would be required to allow a newly-formed independent government to salt Scotland’s oil money away.

Prof Kemp said that, with such details still needing to be resolved, the SNP was right to argue that the referendum should be held in 2014, allowing a full two and a half years to develop the debate.

He also laid out the principled case for an oil fund saying that, even now, a separate investment should be made from North Sea oil revenues, with or without independence. Referring back to the mid 1980s, at the highest point of oil production, he said that the country had allowed its oil booty to be consumed in unemployment benefits rather than be used up as an investment for the future.

Prof Kemp – who was praised yesterday by First Minister Alex Salmond for his “magnificent” academic work – said more studies now needed to be done to show how a Scottish oil fund would work, and how it would be afforded by a government.

“They [the SNP Government] should do that so we have a more informed debate.”

He said ministers needed to show “how will it relate to the Scottish budget” prior to a referendum to show people how it would work before they vote on independence.

His call comes after Mr Salmond used a lecture at the London School of Economics last week to announce plans to set up an investment fund on the back of Scotland’s oil revenues. He said he would like to put aside £1bn a year of oil taxes for twenty years, saying that the country would eventually build up a £30bn cushion.

His plan copies similar funds pioneered by Norway and other oil-rich nations which have built up huge multi-billion pound funds on the back of their own oil reserves.

Mr Salmond said, by contrast, the UK Treasury was one of the few oil producing nations which had not built up a fund on the back of its natural resources, ensuring the country was left with little to show in return.

However, the CPPR – an independent body of economists based at Glasgow University – warned earlier this week that, in an independent Scotland, there was “little prospect of any fiscal surplus becoming available” to help set up such a fund.

Tax revenues from the North Sea would be needed to “help close the budget deficit that emerges from maintaining existing levels of public services”.

Prof Kemp told The Scotsman that taxes which accrued from the nation’s “capital stock” should not have been used to fund current spending. He said: “Oil revenues are part of the nation’s capital stock. Therefore, you have to do something to ensure that the capital stock is maintained and, therefore, we need to make sure that the revenues are invested rather than consumed.”

A spokesman for the Scotland Office said: “On the oil revenues, the economic truth is that you simply cannot both save and spend the same money at the same time. The Scottish Government should set out how it would afford this fund.”

A Scottish Government spokeswoman said: “We welcome Professor Kemp’s support for the establishment of an oil fund for Scotland, and for holding referendum in 2014. As the leading expert on the North Sea industry, his support for an oil fund is extremely important.”