Has Scotland already spent its oil fund?

In this post in April I responded to a Scottish Government document which offered a summary of trends in total Scottish tax receipts since 1980-81. The document shows that Scots have paid more tax than UK tax payers if a geographic share of oil revenues is allocated to Scotland. Hence, according to the Scottish Government "Scotland more than pays her way in the UK."

My April blog sought to point out that conclusions about Scotland paying her way need also to bring spending into account. The blog showed, using Scottish Government data, that spending per person in Scotland has also been higher in each of the last 30 years than it has been across the UK as a whole.

I concluded, that the data suggest that "the greater tax receipts were invested for the people of Scotland, creating jobs and investing in public services. ... The Scottish people have received a significant dividend from North Sea oil revenues .."

I have recently revisited these data and can conclude not only has Scotland received a significant dividend from North Sea oil revenues, it has been almost fully compensated for these higher revenues by higher public spending.

The chart below shows tax and spend per capita in Scotland over the period 1980-81 to 2011-12 at 2011-12 prices.

When you do the numbers, over the 32 year period the total value of tax receipts is £1,425 billion while the total value of public spending in and for Scotland is £1,440 billion. Spending was nearly £15 billion higher in Scotland than the tax receipts including a geographic share of oil revenues. That amounts to additional spending over and above tax receipts of £89 per person per year.

So, it could be argued that the large oil revenues in the 1980s generated a surplus. This was banked with the UK Treasury building up an oil fund that was then drawn on subsequently to meet Scotland's needs.

It might be objected that the gap between public spending and tax receipts was much greater in the UK than Scotland. This is correct. In fact the amount of spending over tax receipts amounted to £644 per person per year. So, net English borrowing was implicitly greater than Scottish borrowing and some of that borrowing was in effect from Scotland. But it has been paid back.

However, a significant, objection to the present analysis is that the estimation of Scottish spending includes a population share of UK public borrowing costs, about 8.3%. With a geographic share of oil revenues assigned to Scotland borrowing costs, at UK borrowing rates of interest, would have been much lower, or even zero, over the period.

For most of the period, the Scottish account would on this basis have been in surplus, as we built up an oil fund in the 1980's (banked with the UK Treasury) and drew it down to meet Scotland's needs.

I estimate using 19 years of Government Expenditure and Revenues Scotland (GERS) that Scotland's share of UK debt interest amounted to £83 billion at 2001-12 prices. Subtracting this from total estimated Scottish spend of £1,440 billion we get a debt interest adjusted estimate of spend of £1,357 billion. Total estimated tax revenues are £1,425 billion. This means that Scotland was in overall surplus by about £68 billion.

To put this another way Scotland had returned to it in spending for the Scottish people 95% of the tax revenues it generated.

So, I hear some supporters of Scottish independence say "well that proves, Scotland can pay its way better than the rest of UK and so would do better if independent."

But this would be an incorrect interpretation of these data.

First, that was the past and actually Scotland did all right from the Union over a period of 30 years.

Secondly, the future looks different as oil will not be at those levels again and production is expected to be negligible by the 2040s according to Kemp and Stephen's estimates.

Thirdly, an independent Scotland would have to borrow to manage cash flow and keep spending at present levels.    There are two problems with that:

1. First, it might well pay higher interest rates. The UK Government was easily able to borrow the money to fund the gap between spending and tax receipts, an independent Scotland would find borrowing more costly and less easy as I and others have noted, for example, here and here. Though, so long as the interest rate paid on Scottish borrowing is not penal it will not be critical. But Scottish government outlays would rise, by about £1 billion if a premium of only 1% above UK borrowing costs is paid as I noted here. That would mean additional borrowing, or a diversion of spending from investment in the people of Scotland.
2. Scotland couldn't keep borrowing to pay for spending in excess of its tax take – the markets wouldn't allow it, especially a new state with no financial track record, with no central bank and borrowing in a foreign currency if sterling is adopted.

Fourthly, Scotland has had the benefit of its oil fund without all the uncertainty that would have been caused in an independent Scotland due to the volatility of oil prices and production.

So, this analysis suggests that Scotland has already spent most, if not all, of its oil fund, while the possibility of creating such an oil fund in a future independent Scotland will be significantly less, unless there are major cutbacks in spending.

Comments

[Dick Winchester]

The assertion that an independent Scotland's economy will remain so dependent on oil revenues is truly risible.

One of the big gains from independence is that it will allow Scotland to act more like the Scandinavian countries and broaden out its economy and grow its industry which will lead to improved growth, higher tax revenues and so on and so forth.

It's worth remembering Brian that you yourself pointed out that something in the order of 70% of post tax revenues in the oil/gas sector (around £18bn) were remitted overseas annually and that demonstrates clearly how little support the industry has had from both Westminster and the "City". Today we have had a report suggesting the potential energy that could be produced by tidal generation in the Pentland Firth is considerably higher than previously thought and yet there isn't a single Scottish company that's genuinely capable of exploiting that potential by supplying the technology.

Reversing this lack of support and investment in indigenous industries will arise with independence.

[RevStu]

"When you do the numbers, over the 32 year period the total value of tax receipts is £1,425 billion while the total value of public spending in and for Scotland is £1,440 billion"

So, an independent Scotland's debt would be £15bn, rather than the projected figure of around ten times that if we take a population share of the UK's debt in 2016? Have I understood you correctly?

[Ben Cawthra]

I keep hearing the mantra that independence would "allow Scotland to act more like the Scandinavian countries and broaden out its economy". As though it is that simple and would be a given. I'd love to see a simple explanation of how this would be achieved so easily...

[Doug Daniel]

"So, it could be argued that the large oil revenues in the 1980s generated a surplus. This was banked with the UK Treasury building up an oil fund that was then drawn on subsequently to meet Scotland's needs."

I'm not sure how you arrive at the conclusion that the surplus was "banked" by the UK treasury. It's quite disingenuous to try to suggest that there was anything even resembling an oil fund being built up, in fact. We all know it wasn't saved, because the Tories needed all the money they could get their hands on to fund the mass unemployment they created. And it certainly wasn't being saved in a wee box saying "Scotland's oil fund - hands off!"

Here's an alternative way of looking at it. If Scotland had been independent, that surplus generated in the 80s could have been built up into an *actual* oil fund, and we'd be enjoying the benefits of that oil fund today. But no, Westminster frittered it all away instead.

Rather than trying to argue that Scotland would still have been in debt even if it had been independent, why not look at the wasted opportunity? I dare say you could quite easily calculate just how big the oil fund would be today if all the surplus had been treated the way the Norwegians treat their oil revenues.

[Mac]

So the long term public sector debt for Scotland is only £15 billion over a 32 year period, just an average of £500 million debt accrued per tax year.

The UK government's public sector net debt now stands at £1,200 billion.

Surely these are telling figures? The UK is hugely indebted, whilst Scotland has never been.

Crucially, importantly, there would be no need for austerity measures in an independent government.

[AMD]

This analysis is interesting, but does it not ignore the revenues Scotland would have accrued via its Oil fund through investing these surpluses?

[mahalakshmi]

We all know it wasn't saved, because the Tories needed all the money they could get their hands on to fund the mass unemployment they created.

[Alan Weir]

If we are interested in these figures in order to assess, as best we can, a counterfactual scenario- would Scotland have done better if it had control over the oil revenues (either by being independent or through devo max)- isn't the assumption you seem to make: that the oil surplus of the boom years would have been banked (at a rate yielding £89 billion over 32 years)- a very strange one?

The surpluses in the first half of the 80s were enormous relative to Scottish GDP. I think in 84-5 we sent 24% of our entire GDP to London in oil revenue and the average in that half of the decade was around 20%. If I remember, GERS calculate fiscal surpluses of around the 16% mark at that time. Even Margaret Thatcher, had she had the equivalent revenues relative to UK GDP- tax windfalls of around £300-350 billion a year or so- would surely have invested in infrastructure rather than blow it all as she did.

So won't economists be able to give some estimate of the consequences of that, from empirical data? If, instead of 'banking' the oil boom surpluses, they had been invested, with average degree of wisdom, in infrastructure and other capital projects in Scotland, what would the boost to Scottish GDP have been- what would our GDP path have been like for the last 32 years, with this initial boost? What would the fiscal surpluses have then been, given actual expenditure minus a deduction for reduced welfare benefits given higher GDP? What would the cumulative boost in GDP have been by now? Would it have been more than £68 billion surplus you calculate (And this can be relevant to your comments about the future, if these figures of 'lost potential' are set against the rUK account in any settling of assets, liabilities and debts on independence.)

[Sherry]

@Ben Cawthra

"I keep hearing the mantra that independence would "allow Scotland to act more like the Scandinavian countries and broaden out its economy". As though it is that simple and would be a given. I'd love to see a simple explanation of how this would be achieved so easily..."

Without a natural focus towards the English economy, and a rebalance towards education, it is likely the economy would transition to one based on high-technology manufacturing, research with a large export sector. This is because these are the sectors where Scotland holds its competitive advantage. Right now the Scottish economy is not properly tailored towards this advantage, and does not have the infrastructure to support it. However evidence that we have, for example the high value that Scottish people place on Education and the Public Sector, are key indicators that our economy holds many similarities to Scandanvian nations.

Can we guarentee that a successful transition will occur? Of course not. To argue either way at this point would be ridiculous. It is equally ridiculous to ask someone to explain exactly how the economy would transition in such a way. However we can assume based on some indicators that such a transition would be in the best interests of the Scottish people.