George Kerevan: Strategic investment will maintain oil revenue

Picture: Jane Barlow
Picture: Jane Barlow
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A properly structured sovereign wealth fund carefully managed can stabilise Scotland’s economy after independence, writes George Kerevan

IS SCOTLAND richer for being part of the United Kingdom, as David Cameron came north to tell us yesterday? Over the 30-year period from 1976 to 2006, in other words, until just before the downturn, the average rate of growth in the UK was 2.3 per cent but only 1.8 per cent in Scotland. Growth north of the Border was a fifth less than the UK for a whole generation – hardly an indicator of prosperity under the Union.

Part of the explanation lies in the destruction of indigenous Scottish entrepreneurship following the nationalisation of Scottish industry by Westminster governments after the war, and the transfer of their corporate HQs to London. For example, plans by Prestwick-based Scottish Airlines – then one of the biggest private airlines in the world – to create a global network were shattered when its scheduled routes were handed over to new, Heathrow-centric nationalised services. Calls by Scottish MPs and chambers of commerce to have local control of public industries devolved to Edinburgh were summarily rejected.

The 1950s and 1960s did see new industries such as car manufacturing parachuted into Scotland using subsidies. But turning Scotland into a branch plant economy was lethal to local enterprise and these firms disappeared when the subsidies ended.

In the 1970s came outright deindustrialisation as the arrival of North Sea oil sent the value of sterling soaring, killing traditional export industries. London politicians were desperate to pump oil as fast as possible to generate foreign currency to pay for imports (Harold Wilson); or cut income tax to get re-elected (Margaret Thatcher). With its industrial base and manufacturing class undermined, Scotland inside the Union was doomed thereafter to slow economic growth.

Pro-Union economists such as John McLaren and Brian Ashcroft will object that it is wrong to concentrate on overall national GDP growth. Instead, they argue one should look at growth per capita, which reflects standards of living. On this measure, the gap between Scotland and the UK is much narrower, with Scottish living standards staying close to the UK average over the past generation and occasionally even surpassing it. Does this let Cameron off the hook? Not at all.

The reason for the difference between average and per capita growth rates is population change. Scotland’s seeming ability to maintain its share (per head) of the UK cake is the result of the massive population loss that resulted from industrial decline, not the result of economic growth. Scotland’s population today, despite a rise under devolution, is barely 1 per cent higher than in the early 1950s. Contrast that with Ireland, which has seen an increase in population of more than 40 per cent by reversing out-migration (at least until the current downturn). You can’t drive hundreds of thousands of Scots abroad and then claim the Union delivered per capita growth at home.

Scotland’s slow-growing population affected the domestic service economy, which is the modern driver of growth. Though the data is complicated to interpret, it seems much of the recent lag in growth lies in the weakness of the retail sector and business services. That’s no surprise given the limited consumer base and the erosion of local entrepreneurship. Imagine instead a dynamic Scotland with a population of seven million today rather than five million, with a correspondingly bigger internal market.

Mr Cameron was very careful to say Scotland could go it alone. That did not stop Ruth Davidson, the Tory leader in Scotland, telling BBC Radio that the SNP’s economic case for independence rested on “fantasy figures”. She dismissed Alex Salmond’s proposal to create a Scottish sovereign wealth fund (SWF) of £30 billion, by salting away £1bn of oil revenues every year. She quoted Mr McLaren, of Glasgow University, that in 2009-10, sans oil revenues, Scotland had a budget deficit of £20bn. So you need all the oil cash to help cover the black hole.

The proposal for an SWF is a litmus test when it comes to evaluating membership of the Union. Oil is a diminishing natural asset. Economic sense tells you to convert oil and gas revenues into permanent assets (shares, bonds, property), so the windfall lasts forever. Instead the London Treasury has spent the past 37 years using the oil money to subsidise revenue expenditure, with nothing left to show for it. .

Of course there are difficulties regarding the creation of an SWF in the present climate (though the Scottish budget will be less constrained by 2017, when independence could take place). However, this problem is a red herring. The Tories and Labour are actually against an SWF in principle. Which explains why Ms Davidson and Mr McLaren fail to offer any ideas on how the present UK government might set up its own SWF rather than just burn oil. A Union that prefers to loot its own natural resources is a Union that does not care for the long-term wealth of its citizens. And why? Because Westminster governments are too beholden to City financial institutions to dare create a rival SWF.

Here is one way of initiating an SWF. Assume Scotland keeps sterling but issues local notes as legal tender (each backed by a Bank of England note to ensure parity). An independent Scotland would also accumulate large amounts of dollars and foreign currency from North Sea oil. The Scottish Government could acquire this foreign currency in exchange for local notes, though these notes would also require exact dollar reserves. As dollar reserves mount there would be less need to keep them entirely in liquid form. Instead, the bulk could be invested long-term (via the SWF) in dollar-denominated, income bearing assets abroad – exactly as China does with its currency earnings.

David Cameron’s defence of the Union seemed very emotional, which I respect. But it was nostalgia for an economic past that never existed.