Tom Miers: SNP’s oil fund pipe dream
Grangemouth could be earning Scotland money. Picture: Jane Barlow
Alex Salmond could have stashed away £5bn from North Sea revenues already if he had really wanted to, but the opportunity has been squandered, writes Tom Miers
The idea of an “oil fund” is once more at the forefront of the SNP’s economic case for independence. In his speech to the London School of Economics last Wednesday, Alex Salmond proposed putting aside £1 billion a year from North Sea oil revenues to build up a fund of £30bn over 20 years.
In these pages on Friday, George Kerevan made an elegant case for such a nest egg. Oil revenues could build up a Scottish sovereign wealth fund, invested in long-term assets to perpetuate the windfall from the North Sea. He criticised the “London Treasury” for frittering away the oil money to subsidise current revenue.
This sounds good, but like many Nationalist projects, it begs an immediate question: if this is such a great idea, why doesn’t the Scottish Government do it already?
Of course, the premise behind such policy aspirations is that Scotland lacks the power and means to undertake them. We’re constrained by our membership of the UK, and if only we had more powers at Holyrood, everything would be OK.
But the truth is that Holyrood already has both the power and the means to set up an oil fund, so the real reason why the Scottish Government has not done so is very different from what Nationalists would have us believe.
First of all, the means. In practice, Scotland already receives the revenue from North Sea oil in the form of the higher spending settlement it gets from the Treasury as guaranteed by the Barnett Formula. In fact, the public spending premium Scotland has enjoyed during the SNP’s time in office is almost identical to North Sea oil revenue.
In the period between 2005-6 and 2010-11, the UK Treasury received £40.5bn in oil revenues. Meanwhile, Scotland received £40.8bn in extra spending over and above that allocated to England on a per capita basis.
In other words, Scotland already gets its North Sea oil revenue, and in a more stable and consistent way than it would if it had to collect the money as a separate nation.
So where does the North Sea oil money go? What does the SNP government do with all those billions?
Well, it is well known that the money is spent on the public sector, partly in providing services for free that have to be paid for in elsewhere in the UK (such as free care for the elderly), and partly on a higher public-sector wage bill.
This brings us to the second part of the question. Could the Scottish Government use its oil money to invest in assets, as Alex Salmond suggests, rather than frittering it away on “subsidising current revenue”? And the answer is, of course, it could. The Scottish Government has the power to reduce current public spending and instead invest the money in long-term assets such as infrastructure or even equity – building up, in effect, an oil fund.
For example, the Scottish Government could allocate £1bn of its spending a year for high-speed rail, or a new water pipeline to the arid South, or new football stadia or new bridges, schools and hospitals. It could take stakes in promising commercial ventures and university spin-offs. These are exactly the sorts of investments made, after all, by the Chinese and Gulf states’ sovereign wealth funds. Haven’t the Chinese just bought a big stake in Thames Water? Didn’t Abu Dhabi buy Manchester City Football Club and part of Gatwick Airport? Well, let the Scottish oil fund buy Rangers, or invest in a new “transport hub” near Falkirk.
Some of the potential investments listed above might not generate a liquid return. But in many cases – investment in new hospitals, for example – the return would be collected direct by the Scottish people. How better to use the oil money. And the added advantage of investing in Scottish infrastructure is that Scots would benefit from those externalised benefits so difficult to realise as an income stream.
A Scottish oil fund could also invest directly in private commercial ventures through the enterprise agency (in a way suggested in the past by George Kerevan, among others). This would have a dual advantage – exposing the oil fund to growth in the global economy, and tackling that bugbear of the Scottish economy, low levels of entrepreneurialism.
So if the Scottish Government already has the wherewithal to create an oil fund, why doesn’t it?
Well, the cynical political answer is that if the SNP administration created an oil fund, it would undermine its own argument for independence. It is certainly true that a cautious, do-nothing Scottish administration is more compatible with the argument for “more powers” than a dynamic, reforming one.
But a more fundamental explanation comes with examining the behaviour of the SNP in and out of power, judging the party by its deeds rather than its words. In practice, the SNP is part of the political consensus in Scotland that favours a high-spend, public-sector-driven model that is antithetical to saving and investment. We have seen how the Scottish Government’s response to the budget crisis has been to cut capital investment and enterprise development while maintaining high current public-sector expenditure. Meanwhile, it has opposed moves to encourage funded pension schemes for public-sector workers.
Are we really to believe that an SNP government after independence would reverse this behaviour, cut public spending by £1bn a year and increase investment by the same amount? Of course not.
This is a pity, because it has become increasingly clear that spending the oil/Barnett premium on higher public-sector spending has not reaped Scotland significant dividends. Most studies reveal that the extra money does not result in higher outcomes, so in effect the oil windfall is being squandered. The irony, therefore, is that the Scottish Government is guilty of wasting the oil money away in a fashion remarkably similar to that it accuses the UK government of.
If Alex Salmond put his money where his mouth is, and put aside £1bn a year, we’d have a fund of £5bn-plus by now. Come to think of it, would that be such a good thing? For the more you think about a “sovereign wealth fund”, the more curious a device it seems. What it implies is that a government – or the quango that runs the fund – knows how to invest our money better than we do ourselves. And the record of governments at investing our money is not particularly impressive. Remember Gordon Brown and the gold? Will Manchester City really reap dividends for the people of Abu Dhabi? Who says that the Chinese sovereign fund is better at investing than individual Chinese, bereft as they are of pensions and social insurance?
One way of looking at the UK’s policy with regard to North Sea oil is that successive governments returned the money to the people in the form of lower taxes, allowing them to make their own decisions about how much to invest and what to invest it in. There are strong arguments in favour of this, both morally and in terms of efficiency. If the Scottish Government cut council tax by £1bn a year, that might help Scotland’s economic recovery more than any quango-run investment fund.
• Tom Miers is a consultant and independent commentator
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Comments
There are 68 comments to this article
Page 1 of 5
footdee
Wednesday, February 22, 2012 at 09:45 PMComment removed by moderator
footdee
Wednesday, February 22, 2012 at 09:42 PMThe Tin Man Tuesday, February 21, 2012 at 05:07 PM 51 Andy Fairnie: "the only beneficial future for Scotland has to be one of independence, for better or for worse." ??? That is a contradiction. I have come to the conclusion that independence is a distraction from things that are actually important, but scary. The concept of moving politicians from one place to another doesn't really amount to a hill of beans.---------------------------Does the sharing of Scotland`s massive resources amoung 5 million people instead of 55 million people mean a hill of beans .
samcoldstream
Wednesday, February 22, 2012 at 08:27 PMThe author's last paragraph is at odds with the rest of his article? One the one hand, the author claims that successive Westminster governments returned the North Sea Oil bounty back to the people in the form of lower taxation, or bribes to be exact, to spend as they liked whilst billions were spent on high unemployment and grandiose projects like the M25 and Channel Tunnel to benefit the South-East of England? Yet, on the other hand, the Nationalists have already bribed the Scottish electorate by freezing Council Tax for their 5 year term. The Institute for Fiscal Studies claims that this "bribe" will be worth some £1.1 billion to the Scottish economy. A reckless Scottish Government could have allowed Council Tax to rip like the previous Scottish Executives and wasted this considerable sum on more capital projects like the Replacement Forth Crossing. However, the Nationalists have resisted this temptation and remain a penny pinching administration with a much reduced Scottish Block.
New Unionism
Wednesday, February 22, 2012 at 05:21 PMMeirs - you are forgetting the sub sea, oil services which you also have to add in est $40 bill per annum or larger
Buford Van Stomm
Wednesday, February 22, 2012 at 10:40 AMComment removed by moderator
Kobi
Wednesday, February 22, 2012 at 12:34 AM#59 "When we are independent we will create an oil fund and the author of this article will look like a fool." When Scotland votes no, you will look a fool. If Scotland votes yes, Scotland will not create an oil fund, and you will look a fool. Guaranteed fool all round.
Newferryman
Tuesday, February 21, 2012 at 10:10 PM61. The point is the wealth distribution is not even. The per capita is just a ruse. And as to chasing a wee white ball about a field. It's something that has never interested me.
The Tin Man
Tuesday, February 21, 2012 at 09:53 PM60 Newferryman: at least you have not descended to the ranks of the comments slaverers who whine about Scotland, and England getting less government funds than Northern Ireland. Who cares? They deserve it. We should pay it. It is wealth distribution. Get with the plan you golf club bigot.
Newferryman
Tuesday, February 21, 2012 at 09:46 PMThis story is complete bunkum. The per capita as percieved by this mathematically challenged idiot does not even come close on the per capita of the London area which is far greater than what Scotland ever recieved. Do not be taken in by this drivel about " Scotland gets more per head than England" drivel.
BrightFuture
Tuesday, February 21, 2012 at 09:41 PMComment removed by moderator
The Tin Man
Tuesday, February 21, 2012 at 06:47 PM57 Vote 'NO': I think that the point is that a Scottish state would have to have an oil fund, because the economy would be dependent on sales of one unsustainable raw material, and cuts would have to be made to government spending, in order to accommodate such a fund, in order to cushion even harder cuts in the future.
Vote 'NO'
Tuesday, February 21, 2012 at 06:33 PMIt is interesting to see that no Separatist has even tried to debate the points put. Nothing new there then. More ammo for the cause as many 'undecideds' will have jumped off the fence and will Vote 'NO'.
Kobi
Tuesday, February 21, 2012 at 05:56 PM#54 You can bend the knee and tug your forelock to Salmond and his sycophants all you like, but in Scotland we have freedom to decide for ourselves, no matter what the SNP lickspittles and their fellow travellers might say.
The Tin Man
Tuesday, February 21, 2012 at 05:07 PM51 Andy Fairnie: "the only beneficial future for Scotland has to be one of independence, for better or for worse." ??? That is a contradiction. I have come to the conclusion that independence is a distraction from things that are actually important, but scary. The concept of moving politicians from one place to another doesn't really amount to a hill of beans.
Roytenn
Tuesday, February 21, 2012 at 04:32 PMKobi, are you thick? The present Scottish Government has always said the people of Scotland are sovereign. That means that they have the choice to make and not to be told when to bend the knee and tug the forelock. Being subservant maybe your wish but there are some people in Scotland who can and will make their own minds up.
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