Thursday, 22 May 2014

Oil & Gas (Part I): For Richer, For Poorer

Context
I explain my bona fides elsewhere on this blog. If you've read them you will understand why I've been so keen to speak up with reference to Independence & Scotland's Trade with rUK and Independent Scotland and the EU.  They are topics that directly impact the businesses I'm involved in and by extension the people I employ, topics where I have direct experience and understanding of the issues which I felt compelled to share in an effort to stimulate reasoned debate on the issues.

Inevitably - having started to speak out on these topics - I have been drawn into debates around other issues and you'll see these expanding on my links list on the right.  This post joins a growing list which could be classified as "responses to pro-independence arguments" which already include

The Oil & Gas Questions
I engaged in extensive debate on this topic as an uniformed observer, trying simply to understand the arguments and form my own view. Here's what I found.

Two common themes relate to the past (which conditions so many attitudes coming in to the debate)
  • They took our oil: Its ours and they took it, we've never had our fair share of the benefit, we've been net contributors to the Union, its simply not fair
  • The Reserves were mismanaged: We should have created an oil fund like Norway's "Petroleum Fund"; the reserves were not exploited appropriately
Two relate to a possible Independent future (which is all our vote can actually change)

  • Oil reserves will be better managed by an Independent Scottish government
  • If we are given our geographic share of the oil reserves, our economic future is assured


1. They Took Our Oil

This is a hugely emotive subject which goes to the very core of the debate about what Union means.

Have the benefits of the "our" Oil been shared fairly?
This has been argued at length of course and there is much debate about how best to measure Scotland's net "contribution to" or "take from" the rest of the UK.  We can think of the spectrum of fairness as being between two points
  1. Scotland gets to keep it's "geographic" share of oil tax receipts (as argued for in the White Paper). This is the equivalent of saying we don't share our oil revenues (i.e. as would be the case for an independent Scotland)
  2. Oil tax receipts are shared across the UK on a "per capita" basis; this would be the most extreme "we're all in this together" view
I'll go out on limb here and say for me actually historically a per capita share is a reasonable way to look at this (as that's what being in a Union means to me); what should be considered fair as we split our assets for an independent future is a different question and there is wide (although not universal) agreement that the geographic basis will be the fairest way.  I'll come back to this; for now let's accept the "geographic share" argument for historical analysis.

To be clear: the "geographic share" argument is the one that is the equivalent of saying "Scotland get's to keep 'our' oil money".

So on that basis how do the numbers look?  I turn here to ICAS , one of my RIBs (Respected Industry Bodies) who provide this helpful analysis of the GERS figures


Hold on a minute; read those numbers again. Am I missing something here?  What this says (for these two years at least) is public spending per capita in Scotland was about 10% higher than in the UK as a whole; across these two years more public spending per capita was received by Scots than the Tax revenue per capita the Scots contribute even if you allocate the oil tax revenues to the Scots on a geographic share. 

To put it another way: in the last two years if Scotland had already been independent and was receiving its "geographic share" of oil revenue (the best case scenario) the country would be running a significant per capita spending deficit and a worse one than the UK as a whole.

I'm struggling here to reconcile the data with the Cybernat rhetoric: "Westminster takes our oil money and gives us pocket money in return" is a refrain I have heard a lot (it competes with "They say we're too wee too poor, too stupid to be independent" line to be the separatists'  most used rhetorical trope).

So how has this narrative slipped in to (some of) the public consciousness?
  • As reported by STV
    • The Scottish Government said: "the figures showed tax revenues north of the Border were £800 per head higher than the UK as a whole, when a geographic share of North Sea oil is taken into account"
    • First Minister Alex Salmond said: “The figures show that tax revenues generated in 2012-13 were £800 higher per head in Scotland compared with the UK, meaning that now for every one of the last 33 years, tax receipts have been higher in Scotland than the UK.
    • "Business for Scotland" said: "With 8.3% of the UK population, Scotland generated 9.5% of UK tax revenue in the five years to 2012/13, for 9.3% of UK spending.
  • Maureen Watt (SNP MSP): “Westminster has downplayed the value of oil and squandered the revenues for more than 40 years"
A special mention must go to"Business for Scotland".  These are one of the noisier COGs registered with the electoral commission as a Yes campaigning body. There'll be more on them in another post; suffice it to say they represent a very particular profile of businesses that - how can I put this? - might have their own reasons for promoting the case for an independent Scotland. One of their spokesmen Gavin MacIntryre-Kemp said the following on Newsnight and Online;
  • “Scotland is a wealthy nation but Scotland’s wealth is transferred to London and our economy is being held back.  Scotland generates 9.9% of the UK total tax take but gets only 9.3% of the UK total spending”.

28/05/14: the section below has been updated from the orginally published version to reflect the latest actual published GERS figures.

I've gone back to the source data (GERS), collated the numbers onto a spreadsheet, extended the analysis for a few years to give us a bit more context and reconciled the ICAS and BfS figures.



So what's going on here?
  • Clearly if you use a geographic share basis to allocated oil tax receipts then yes, tax receipts are consistently higher per head in Scotland ...
  • ... but Scotland gets that money back in increased public spending per head
  • But how does that square with the "higher share of tax receipts but lower share of public expenditure" argument?
    • Firstly the year chosen for the 9.8% vs. 9.3% quote was 2011-12 and we now have 2012-13 data available.  The five year data series helps put this volatility in context.
    • Secondly it's simply misleading to present the data in that way "because maths"; the UK has been running a deficit, Public Expenditure is higher than Tax receipts; this means the 9.3% is of a bigger number than the 9.9%.  This is why ICAS (a Respected Industry Body, professionals at presenting numbers and with no political axe to grind) present the data the way they do.  It's why all the main economic forecasters and analysts focus on per capita figures.
So we can  make some simple statements (with caveats on time periods selected of course, but you can see the data above) that are completely consistent with (but far more meaningful than) the Yes campaign's single statements quoted above:
  1. The Scottish people receive back in higher Public Expenditure per capita an amount equivalent to the higher Tax revenue per capita they could lay claim to contributing
  2. In the last five years: If Scotland had been independent (with it's geographic share of oil revenue) and making the levels of Public Expenditure that have been made whilst part of the UK
    1. Scotland would have been running a significant deficit (similar to the rest of the UK)
    2. In recent years the scale of that deficit is greater for Scotland than the UK as a whole
Remember: these figure are run assuming geographic share  (84 - 95%) of oil revenues attributed to Scotland.  

[There is a different argument sometimes put forward around these figures that goes something like "but if we hadn't had to pay our share of the UK debt interest burden then we'd have been far better off". That sounds like a patently ridiculous argument to me, but I will return to it in another post if need be.]


Were we (are we) honour bound to share the benefits of "Scottish" Oil?
Its important to remember that the above analysis is based on geographic share of oil tax revenues; it's saying "what would the numbers have looked like if we hadn't shared the oil tax revenues".  It's informative to run "what if we had been independent" analyses; but its logically flawed to then say that if the historical analysis were to show we would have been better off without sharing then that mean we've been unfairly treated as part of the Union. I think this point gets missed because the Independence case falls at the first hurdle: there is no compelling evidence that an Independent Scotland would have been better off if it had got to "keep" its oil revenues.  But why do we even accept that premise for historical purposes?

The marriage analogy gets over used but in this context I think it's a genuinely helpful one.  People enter into a Union "for richer, for poorer", the underlying principle of a Union must surely be that we pool our assets and resources, we share risks, we share pain, we share good fortune.

Much has been written about nations' "inherited guilt" (about e.g. slavery or the holocaust); a quick Google search tells me "inherited responsibility" is less discussed, but it's surely a concept that applies here.  Nobody alive today signed up to the Union with England Act; its something we inherit.

[Out of curiosity I read the Union with England Act 1707.  Couldn't find anything in their that helped, it just depressed me to be honest -- Clause XXV is a doozy. To quote Stephen Fry (talking about Culloden): "Catholic versus Protestant, essentially. It's that kind of fight. And it goes on to this day. Will we never learn? Who knows? Religion. Shit it."]

Let's try a few thought experiments
  • Would we apply the argument "We'd have never entered the Union if we'd known we were going to find oil off our coast"?  Surely that's like saying I'd never have married you if I'd known I'd already got a winning lottery ticket in my pocket?  Some may think that's a reasonable attitude; I'm not one of those people.
  • If the discovery of a valuable resource is in itself a good enough reason to "split" from your previous partners, doesn't that set a dangerous precedent?  
    • What about Shetland's claim to the Oil revenues, why should they be sharing the fruits of that windfall with the rest of Scotland, let alone the rest of the UK?  Remember too that as a LibDem stronghold they would also be able to apply the (flawed) "we don't get to choose who governs us" argument as well
    • If today's "news" headline Billions of Barrels of Oil have been found in the ground beneath the South of England were taken at face value, would "we" expect "them" to say "its ours, the wider UK shouldn't benefit"?
So as I've mentioned above; for me actually historically a per capita share is a reasonable way to look at this (as that's what being in a Union means to me); what should be considered fair as we split our assets for an independent future is a different question.

This may help illustrate my point.  When analysing the benefit to Scotland of the UK Governments Financial Sector Interventions the GERS argues
  • "There are various methods that can be applied to apportion a share of such non-identifiable expenditure to Scotland. The method used in this edition of GERS assigns a population share to Scotland of the total UK expenditure, on the basis that all areas of the UK have benefited equally from the resulting stabilisation of the UK financial system."
So it seems that sometimes the Scottish Government believes that being part of the Union does mean "we're all in this together" after all.

So what would the historical numbers look like if we took the per capita approach?


I've left the %age share of spend numbers in there for comparison purposes and it's worth noting that if we shared oil assets equally equally we'd be getting a higher share of public spend that our share of tax receipts generated; but hopefully we can agree now that is a silly way to look at the figures.  

So if we had been sharing oil money equally (per capita) then net expenditure in Scotland would have been - consistently  - well over £1,000 per capita higher than the UK average.

Am I alone in looking at these figures and thinking; "You know what, the Union has treated us pretty fairly when it comes to reinvesting oil proceeds into the Scottish economy through Public Expenditure"?

Actually it turns out I'm not alone. As I was finalising this post and sourcing links I found this rather excellent article by Professor Brian Ashcroft. The graph below is extracted from that article and provides a helpful
longer term perspective on the same question; his conclusion appears to be the same as mine.



*******************************************
Its worth highlighting that all of the analysis above takes a narrow view of the benefits received by Scotland from being part of the Union (i.e. Public Expenditure received).  It's a topic that deserves a separate post.

OK, that's it for Part I (I've got a plane to catch).  I will return in Part II to cover the following arguments
  • The Reserves were mismanaged: We should have created an oil fund like Norway's "Petroleum Fund"; the reserves were not exploited appropriately
  • Oil reserves will be better managed by an Independent Scottish government
  • If we are given our geographic share of the oil reserves, our economic future is assured
********************************************



11 comments:

Anonymous said...

As you take as read, the notion of a "population share" is a management tool or metric, useful to those governing the UK as it stands. The insidious aspect to the idea comes when it's suggested that there would be any conceivable reason why an independent Scotland would be entitled to something less than all the oil in its waters: to which the answer is http://reportingthereferendum.blogspot.co.uk/2014/02/a-geographical-share-fair-assumption.html

Kevin Hague said...

I don't disagree at all: an Independent should get its geographic share. The only relevance of per capita is for historical analysis as part of the Union.
Notwithstanding, as the analysis show historically (at least on the data I've seen so far) Scotland has effectively received its geographic share back in higher public spending.

That looks fair enough to me; what am I missing?

Ewan MacKenzie said...

I arrived at your blog as a result of an extremely patronising tweet ("Try thinking, it's liberating") but I'm glad to see your blog is more thoughtful.

I could comment on just about every part of this post, but life's too short, so I'll keep it brief.

I don't take much issue with much of what you say about the past: as a part of the UK, the oil wealth goes into the central pot rather than benefiting only one part of the country. Fair enough. But the argument isn't about the past (except for illustrating "here's what you could have won"). It's about the future, about what Scotland could be like in the future. And we can only do that by dissecting the actual figures from the recent past.

You appear to be bamboozled by the 9.9% of taxes / 9.3% of spending thing, in the sense that you don't see the relevance of the figures. Well, consider the other side of that relationship: the rest of the UK contributes 91.1% of taxes but gets 91.7% of spending. So if your analysis is that Scotland benefits from such a position, then presumably your further analysis is that rUK also benefits, but much more so.

But there's more. The figures for Scottish spending include items we wouldn't be paying for if we were independent. The figures include £3.5bn p.a. (£700 per head) for defence, of which only £1.5bn is spent in Scotland (and that includes all shipbuilding).

If we were independent, we could easily save a billion of that, and still manage to spend more of it within Scotland - AND provide armed forces that actually gave Scotland what it needed, e.g. surface ships based here, not 500 miles away; rather less spending on foreign wars; troops based within Scotland, benefiting local economies.

We would no longer need to contribute £50m towards the running of the houses of Commons and Lords.

We wouldn't have to contribute to projects ostensibly for the benefit of the whole of the UK (so with no Barnett consequentials) such as London Crossrail and London sewer renewal, if we're looking at the past, and HS2 and Trident replacement, if we're considering the future.

We would also save on our share of government bureaucracy. At the moment, Scotland outsources a huge amount of work to rUK, and primarily to London - one of the most expensive places in the world for staff and office costs. The same bureaucracy in Scotland would be cheaper for three reasons. 1. Lower staff and office costs 2. tax and NI contributions from those jobs would come straight back to the Scottish treasury 3. the net income would benefit the wider Scottish economy by being spent largely within Scotland.

Finally, in your reply to a previous commenter, you say "Scotland has effectively received its geographic share [of oil revenues] back in higher public spending". Except it hasn't, because you haven't taken account of the accumulated debt that the Westminster government have kindly borrowed on our behalf. The analysis by noted unionist Prof Brian Ashcroft showed that, if Scotland had been independent since 1982, and it had had the same spending patterns as it did as part of the UK over the same period, it would have an accumulated surplus of £68bn, not a share of a £1.3tn debt. See http://www.scottisheconomywatch.com/brian-ashcrofts-scottish/2013/07/has-scotland-already-spent-its-oil-fund.html. Actually, he concludes that "Scotland did all right from the Union over a period of 30 years", which is a bizarre conclusion when you've just shown a surplus of £68bn was turned into a debt of £80bn or so. He seems to think it was worth it. I disagree.

Ewan MacKenzie said...

I mean 90.1% of taxes / 90.7% of spending for rUK. Duh.

Kevin Hague said...

Ewan: thank you for taking time to read and respond so thoroughly; it's exactly the sort of reasoned argument that I have been frustrated simply can't take place with the 140 Char limitations of Twitter.

I also apologise if those frustrations led me to be be a bit patronising on a Tweet -- I did check and it wasn't to you and was in response to some provocation but, nonetheless, I regret coming across like that.

To your points (briefly)

"bamboozled"? If I was inclined I could suggest that is a partonising statement ;). I've re-run the numbers with actual GERS totals (I'd crudely grossed up via population #s before) and realised in the process there was actually a spreadsheet error (nobody would have noticed but I feel its only fair I hold my hands up on that).

The overall story is unchanged and I really don't think I'm bamboozled by the numbers -- I have gone to source, recreated all the figures quoted and shared my interpretation. What you are doing is taking 1 year and drawing a conclusion (exaggerated by the use of misleading %age figures instead of absolute per capita ones) .. I show the longer trend and look at the more representative figures and leave it to the reader to judge who's conclusion is right.

I could comment on each of the "we wouldn't need to spend as much" examples you give (I disagree with your conclusion in every case) but that is for a separate post -- the main point I would make is that *nowhere* have the pro-indy campaigners shown even an estimmate of the full financial costs of separation (partly because there are massive costs simply not estimated at all) and no attempt has been made to actually add up the sums. If I've missed that analysis please point me towards it. Without that analysis cherry-picking examples that you think are net cost savings is a meaningless exercise.

As for the Brian Ashcroft reference ... well I'd read that article and now I've read it again. He explains very clearly why he draws the conclusion he does so I won't repeat it here. I suggest you re-read and reconsider if the conclusion is really so "bizarre"

Ewan MacKenzie said...

Kevin

Thanks for your reply. You're right, this is much better than Twitter.

I wasn't suggesting you were bamboozled by the figures (you're clearly not), but by the notion that comparing % of tax and % of spending is a valid way to present figures. It is.

Suppose that it's not possible for governments to borrow (or save), so that every year taxes=spending. In that case, it would clearly be valid to compare the relative levels of tax and spending in different parts of the country by comparing the percentage of tax raised / money spent in each part of the country. You could draw up a table as follows:

Region | % tax | % spend
----------------------------------------

Mordor | 24% | 25%

Narnia | 24% | 25%

Nod | 24% | 25%

Oz | 28% | 25%


In this example, all four regions receive the same amount of spending (in cash terms, not necessarily per head), but it's quite clear that Oz is paying slightly more in than it's getting back, and the other three regions are paying in slightly less. The table above illustrates very clearly, for each region, what its relative contribution to the national accounts is. If it happens that Oz has only half the population of the other regions, then clearly spending per head must be double that of the other regions, but that doesn't alter the conclusion that Oz is a net contributor and the others are not, and it doesn't alter the usefulness of the table's figures.

Now suppose that the government is allowed to borrow, and as a result all regions increase their spending by 1%. So the amount of borrowing required by the government is 1% of spending, but in cash terms Oz is still paying in more than it takes out, and the table continues to illustrate the relative contribution of the regions. This remains true whether Oz has a higher or lower population than the other regions.

What if all regions increase their spending by 10%? Now Oz is also spending more than the tax it's contributing, but to a lesser extent than the other regions. And the table still illustrates the relative contribution of the regions to the central accounts.



I've read Brian Ashcroft's article again. I think the crux of the matter is in his comment:

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

That is, on average, 95% of our taxes were either returned to us in the form of government spending here, or were spent elsewhere but (supposedly at least) for our benefit; while the remaining 5% of Scotland's taxes were retained by Westminster and used for things that didn't benefit Scotland in any way whatsoever. That's 5% every year, totalling £68bn over the period. That's £68bn which, if we'd been independent, we could have spent or saved (or benefited from in the form of lower taxes). What we actually got was a share of the UK's deficit, which is so big that taking account of the interest payments turns Scotland's otherwise balanced public finances into a substantial deficit.

And he describes this as doing "all right from the Union over a period of 30 years"? Bizarre.

This is now too long for a single post, so I'll split it here.

Ewan MacKenzie said...

Costs of setting up required bureaucracy: I don't pretend any special knowledge of this, but there's been a lot about it in the news over the last few days. The following figures are from memory but I don't think they're far wrong.

The Treasury's published figure was around £2.7bn. Prof. Dunleavy said that was a 12x over-estimate. Later he estimated £150m - £200m, which is in the same ballpark as Alex Salmond's estimate of £250m.

I also heard Danny Alexander claim that Canadian research had estimated costs at 1% of GDP. That's a one-off cost. Compare that to the 5% of taxes (so ~2.5% of GDP) every year for 30 years that Brian Ashcroft thinks is an acceptable price to be in the union.




Finally, I'm surprised that you disagree with my examples of savings that could follow independence, as I thought they were pretty uncontroversial. You don't say exactly what you disagree with, but let me expand upon my comments and then perhaps you could expand upon yours.

Defence spending: given that nuclear weapons is an example of something Scotland is actually too poor to afford, it seems reasonable to me that our defence spending, post indy, should reduce by at least our share of Trident running costs. If not, then you're suggesting that our expenditure on conventional forces should be even higher (in % of GDP terms) than the UK's, and the UK's is already one of the highest in the world. Spending 2.5% of GDP would put our expenditure on a level with comparable nations. And whatever we spend - likely to be between £2.5bn and £3.5bn - more of that would be spent in Scotland than at present and so would benefit the Scottish economy more than at present. (Personally though, I like the Costa Rica approach, but I'm not in charge and that's never going to happen.)

Crossrail/Sewers/HS2/Trident replacement/Commons/Lords: I've nothing to add, but I'm interested to know under what circumstances an independent Scotland would continue to contribute to the costs of these.

Benefits of not outsourcing bureaucracy: I've nothing to add, but again I'm interested in your analysis of why this is wrong.



This has become rather long, but I do hope you will be able to reply in detail to it, preferably point by point. I genuinely want to understand exactly why you see things differently from me.

Kevin Hague said...

Ewan: To your first post of two posts above. What you say is true "if tax=spending" .. if it doesn't, (and it doesn't) then %age comaprisons are misleading its as simple as that. The numbers are there in black and white so we don't really need to debate that point further.

My view on the "our" oil point is covered pretty well in my original blog: historically we shoudl have shared it, we are in a Union after all ... that we kept 95% of it in effect is doing pretty well out of what is meant to be union of sharing. I accept that one can then debate what that money was spent on, how fairly attributed ... the point is the rhetoric Yes to that point is argued on these numbers without further subtlety and on that basis, IMHO, doesn't stand up to scrutiny

Kevin Hague said...

Ewan: on your second comment.

The first paragraph is already covered but let me restate it. We were in a Union where we expect (both ways) to share assets and risks, to pool our resources, "to be in it together" ... that we effectively "shared" our oil revenue "95 to me, 5 to you" is, um, not too bad.

Defence spending I haven't yet covered in my research so I simply don't know enough about the details and trade-offs to comment. You might well be right. I have followed my nose in the debates and defence spend has not (yet at least) been given much airtime.

On the other costs I am working up a full analysis as I think part of my problem is I've never seen a reasonably comprehensive and well researched/sourced summary of the numbers involved. Until I've completed that I won't comment further as I like to have done my research fully and understood big picture before arguing specifics. There are certainly plenty of arguments to consider against any mooted cost savings: bureaucracy duplication, other cross-subsidising (energy pricing & flat-rate postage for example), loss of scale benefits, creation of new sources of friction and inefficiency because of need for arm''s length agreements, regulatory bodies etc.

So I need to work that out before I can respond meaningfully.

Appreciate the thought and time behind your comments.

Ewan MacKenzie said...

Kevin,

on tax/spending %ages, we are just going to have to disagree. I've given you a step by step analysis, starting with simple figures and becoming more complicated in discrete steps, which is the best way to analyse complex problems because it's easier to spot logical disconnects. I don't know what your background is, but mine is a degree in maths/statistics followed by a decade in the financial industry (and then other stuff). I understand numbers at a deep level, and all my knowledge and experience tells me unequivocally that the tax/spending %age comparison is as valid when there's a deficit, or when there's a surplus, as when there's not.

On the oil point, can I just point out that we didn't give away 5% of our oil revenues, we gave away 5% of all our revenues - oil, income tax, VAT, NI conts, corp tax, CGT etc. I've already agreed that as part of a union "pooling and sharing" is what it's all about. I just disagree that "pooling and sharing" has been to our benefit as Better Together claims it has, and I think Brian Ashcroft's analysis that showed a potential £68bn surplus became an actual £80bn debt illustrates that perfectly. And that's taking full account of the "extra" spending through Barnett, and ignoring the sums that an independent Scotland wouldn't have spent on nuclear weapons, foreign wars, London sewers etc.

(Incidentally, if the UK currently had a £1.1tn surplus instead of a £1.3tn debt (which is proportionately the same, but in reverse) then I think everyone would be thinking the UK had had a pretty amazing 30 years. I would anyway. Would you? Not a rhetorical question.)

I note you're going to look in more detail at defence spending and other matters. I look forward to reading about it.

To change the subject completely, I note from your profile that you're involved with Endura. My Merino Baa Baas are my most favourite bit of kit ever. In fact, they're among my most favourite things ever - they are SO good.

But I'm more of a hillwalker than a cyclist, and I would love to be able to go into Tiso's, for example, and buy some gear from a Scottish company. Particularly if it was actually made in Scotland - something I haven't been able to do since North Cape went belly up decades ago (excluding Slioch, which was tiny and out of my price range at the time anyway).

So, is there any chance of Endura expanding into the mountain equipment area? Obviously not something that you'd go into lightly, but... could be great...

Stephen Wigmore said...

Would be nice to be able to learn about a relatively technical economic issue without the random bit of Christian bashing half way through.