We don’t need to count on oil to balance the books

 

The Institute for Fiscal Studies (IFS) advises that a country cannot depend forever on a diminishing resource. This is insightful. The institute also counsels that if you persist in spending when your income is drying up, even the relentless optimism of Wilkins Micawber won’t save you.

I’m paraphrasing, just a bit. On the other hand, who knew? Scotland’s oil, like everyone’s oil, is going to be a memory before long. Someone should have told us. When the black stuff is gone, it’s gone. Then where will we be? That might depend on where in reality, come the day, we are.

The IFS suggests we might want to consider raising taxes, cutting spending, or both. It mentions the fiscal challenges of demographic change. In its report, published on Monday, the IFS tests several possibilities available to a post- independence Scotland, but omits one: that the Scottish economy might not continue as before. The institute simply applies and subtracts oil money to the economic facts – those that are available, at any rate – of Scotland-in-the-UK.

You can’t necessarily blame the IFS for that, of course. Yet even when employing statistics that guess at Scottish GDP, and ignore the very notion of a gross national product (no figures available), it kills the myth of a dependent client country stone dead. Scotland more than pays its way. In fact, if there existed a proper measure of the relative benefits of defence spending, as opposed to an arbitrary £630 a skull across the UK, we would be doing better still.

The institute’s briefing note – Scottish Independence: the Fiscal Context – doesn’t stoop to dignifying the usual fictions. This will prove handy in future. Equally, the IFS is sanguine about our prospects in the first years after independence. This should also have an interesting effect on the argument. According to the numbers employed, Scotland will continue much as before. No great catastrophe is envisaged.

Instead, the IFS makes a couple of related arguments. One is that public spending – £1171 above the UK average, depending on what you can identify as public – would not allow much scope for savings from oil revenues, in the Norwegian style. When the oil runs out, meanwhile, present arrangements would become, as economists love to say, “unsustainable”. We have 40 years in which to consider the challenge, in other words.

The IFS would also like it to be known that the oil price is volatile. Unionists translate this into a warning: the budget of a big economy, such as the UK’s, can handle a sudden fall in the price; a small economy would struggle. The institute therefore suggests it might be an idea just to ignore oil when an independent Scotland is attempting to balance the books.

The price of crude is certainly volatile. At the moment it’s rising again, thanks partly to the Israelis. Will it fall greatly in the long-term, given the demands of emerging economies and a shrinking supply? If the Americans are serious about energy independence, with even Barack Obama pinning his hopes on shale, it certainly might. But an absolute collapse in global demand looks unlikely. “Volatility” could be better expressed as “occasional dip”.

Still, it’s running out: so much is obvious. Most observers talk in terms of 40 years (forgetting to mention the oil industry makes no predictions beyond that horizon). But as one politician said last month of Shell and Exxon Mobil’s new Fram field south-east of Aberdeen: “The durability of oil production in the North Sea constantly confounds expectation.” That was John Hayes, the Tory Energy Minister. Fram is expected to add 2% to (UK) oil production.

Its emergence cannot prevent the inevitable, of course. The broad point made by the IFS is incontestable. Having been denied the chance to create an oil fund in the Norwegian style, an independent Scotland will have to prepare, sooner or later, for a post-oil future.

Without the benefit of crude we have muddled along in recent years much like the rest of the UK: in 2010-11 non-oil per capita GDP was £22,816, against an average of £23,242 (with a great deal of Government spending ignored). Had the North Sea been ours, on a geographic basis, Scotland’s GDP would have been 117% of the UK level. This, in turn, would have placed our “lavish” public spending in a different light.

Towards the end of its paper, the IFS observes: “There are, of course, very many other issues that will matter for the Scottish economy, and ultimately for the health of its public finances: the conduct of monetary policy; the conduct of other aspects of economic policy including regulation, not least of the financial sector; industrial policy; and so on. These are all outside the scope of this paper.”

That counts as a pity. It also counts as a curious omission when issues of tax and spending have featured so prominently. How many countries have achieved independence with an asset like the North Sea to call on while shaping monetary policy? What happens if a nation is able to export other kinds of energy besides oil, energy that will not run out?

The IFS admits Scotland could “inherit a somewhat lower debt to GDP ratio” than the rump UK. Parity is the worst that could happen. But then the institute frets over potential borrowing costs and the view taken of independence by the markets. It could as well ask, but does not, how those markets would view a small nation with a large asset good for 40 years, and with a clear potential to join the list of the world’s most competitive nations. Fourteen of those are defined as “small”.

The IFS is sober, unbiased and honourable. It is also a touch Londoncentric, if that’s a word, in assuming oil is Scotland’s only asset, and the sum of all its potential. The idea that energy and wealth are being drained by a failed Union is meanwhile “beyond the scope” of institute thinking.

Only fools ever said independence would be simple. Only the deceitful can still pretend it is unthinkable.

(This article is a repost and first appeared in The Herald).

Comments (6)

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  1. Barontorc says:

    Ian Bell’s take on the IFS report is clearly not impressed. The authors, have baulked at looking forward with any realism, never mind taking a leap towards optimism, so it still looks grudging and if that’s the best we’re going to get, it’s good that Ian Bell spells that out…sans Gardham-twistisms. I’d bet there’s some regular ding-dongs in that Herald canteen of a day – and only as it should be when their ongoing paychecks are looking decidedly shoogly !

  2. I have said for years,at least for 25 years that a country that is a food net exporter,and power net exporter is already a rich country.The oil is a bonus for the whole country not just a few at the top.

  3. Upon Scottish Independece, Scotland is going to have a massive infrastructure boom of hotels and anciliary services, energy/renewables white collar and blue collar technology/industry boom, and a lean, fit-for-purpose higher education sector that actually contributes to the social engineering of a Modern Scottish society, economy, and workforce.

    But we only get this, and much much more good things, if we vote ‘Yes’ for Scottish independence.
    If we vote no, then look forward to extreme poverty like Greece, Spain, and Portugal.
    It’s NOT about the fear-factor of the unknown anymore, it’s about plain & simple guaranteed survival of all Scots’ and Scotland by voting for Scottish Independence.
    Scotland cannot afford to vote no.

  4. Alex Montrose says:

    It seems to me that the IFS are saying, that if,

    The price of oil remains the same, an Independent Scotland will get by.
    The price of oil falls, an Independent Scotland will struggle a bit.
    The price of oil rises 50% over the next 10 years, silence.

    T

  5. John McCall says:

    O/T Can I just say how repugnant I find the image conflating bagpipes with a Kalshnikov in the Scottish T-shirt uprising ad appearing on this site. I deeply resent ANY association of violent uprising or armed insurrection with symbols of Scottishness. Violence has nothing to do with Scottish aspiration and I am disgusted that this site, which is generally intelligent and forward thinking, should have such poisonous imagery appear on it.
    Shame on you.

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