Mind the Gap

Yesterday I appeared on John Beattie's Radio Scotland show to help "fact check" a couple of the statements made by Nicola Sturgeon during her interview with Andrew Marr (I wrote about it shortly after it was broadcast on Sunday: Marr Fails to Grill Sturgeon.).

The other person on the line from the studio in Bath was Stuart Campbell, custodian of Wings Over Scotland and a crowd-funded SNP apologist. If you're just interested in the facts you can skip the next section.

---

I recognise the term "crowd-funded SNP apologist" may seem rather dismissive. I use it only because during the broadcast Stuart referred to me as "some dog food salesman". It was a predictable attempt by him to deflect from the point being discussed by getting a rise out of me and I wasn't going to waste valuable airtime by biting.

In his rapid-rebuttal blog post immediately after the interview he refers to me as "an amateur blogger with a keen interest in Pedigree Chum".  Quite why the fact that I'm an "amateur" blogger (translation: runs real businesses and does this in their spare time) is considered relevant I don't know. He's a "professional blogger" which presumably means he'll have the time to be far more informed and better researched than I am ...

Oh and the business of mine he's referring to? It doesn't sell Pedigree Chum - but then Stuart never has been overly bothered about factual accuracy

---

You can listen to the part of the broadcast I participated in here. It was an interesting debate (do listen if you have time, the segment was about 15 minutes long).

The conclusion on question one was pretty unequivocal. The statement made by Sturgeon that we were testing was:

the projections the Scottish Government made were in-line with [chuckle] all [/chuckle] external projections for prices and for revenues …

This statement was shown to be false.

Stuart from Bath asserted that the statement was in fact true because the price assumptions used were in line with (among others) the OBR. Unfortunately - despite being a "professional" blogger invited on to comment on this specific question - Stuart appeared not to know what the revenue forecasts he was defending actually were.

I observed that at the time of writing the White Paper the £7.9bn oil revenue assumption the Scottish Government used for 2016-17 was £5bn higher than the £2.9bn the OBR were forecasting at the time. I suggested that it was therefore clearly incorrect to suggest that the SG forecast was in-line with all external projections for prices and revenues.

[I also pointed out that they weren't even in line with the OBR on price  - at the time of the white paper the OBR were forecasting $97 versus the SG's $113 - but that was beside the central point.]

I showed that the fact that the forecasts were not in-line with others' was clear at the time of the referendum by quoting the IFS May 2014 statement on "Oil: The Continuing Source of Disagreement"

The main point of disagreement is the different forecasts for revenues from North Sea oil and gas used. Our figures and the Treasury’s figures are based on the Office for Budget Responsibility’s projections. The Scottish Government report instead uses their own – higher – forecasts for North Sea revenues.

Stuart countered with some predictable ad hom against me and accused me of "obsessing with the OBR's projections" as opposed to "everyone else". Unfortunately he wasn't able to cite a single alternative oil revenue forecast made by anyone else to back up his assertion. At the time of writing he has still not (either on twitter or his blog) been able to cite a single alternative forecast that would back up the statement.

I've checked the SNP's website - they're famed for the speed of their rebuttals but I see nothing there to support the FM's assertion.

I've gone back to read the Scottish Government's Oil & Gas Bulletin from March 2013 which includes the £7.9bn figure for 2016-17. The only other revenue forecast they refer to is the OBR (in the 5 page document the OBR is mentioned 10 times).

We've established that the £7.9bn forecast was not in-line with the OBR and that the OBR (who are relied on by HMRC and the IFS among others) is a very significant "external forecaster".

So the statement about being in-line with all external forecasters when related to revenue forecasts in the White Paper is demonstrably false.

What interests me now is: were they actually in-line with any credible external forecasters when it came to forecasting North Sea Oil revenue generation in 2016-17? I'm sure they'll be able to dig out some from somewhere, but the fact that they haven't been able to yet speaks volumes.

For completeness: the second point under debate was something I agreed was - as narrowly stated - true because it was a truism. Sturgeon said.

Well, I've said our growth in onshore revenues over the next few years is projected to [chuckle] significantly [/chuckle] outstrip the decline in offshore revenues ...

As I pointed out - if you're flexible enough in your interpretation of a "few years" to include 8-10 years - then of course underlying GDP growth will eventually replace lost oil revenues. The point I attempted to make was that if you have to use all of the GDP growth over the next 8-10 years merely to plug the gap left by oil you can't use that GDP growth to invest in public spending. A corollary of this is that the fiscal gap that exists between us an the rest of the UK - widely referred to as the "black hole" - wouldn't be closed because of course the UK's GDP is also growing.

Stuart suggests that because I accepted Sturgeon's statement was a truism this somehow represented (I'm directly quoting his subsequent blog post here)

"categorical agreement from the Yes and No sides alike that actually the falling oil price makes an independent Scotland MORE economically viable, not less"

I mean this is really desperate stuff.

He justifies this because he quoted an unrelated BBC report (which I've now found here) which did indeed say:

The Scottish economy will continue to pick up pace, despite the lower oil price having an adverse impact on the oil and gas industry.

The Fraser of Allander Institute's regular forecast shows the boost to oil users in Scotland outweighs the harm to North Sea producers

It turns out that report was dated March 2015 (so nearly a year out of date) and also stated

The University of Strathclyde institute's report's conclusions run counter to the view of the Bank of England governor, Mark Carney.

He said he expected the UK economy to be helped by lower oil prices, while the Scottish economy would not be

So I've had a quick check to see what the Fraser of Allander Institute are actually saying now (rather than nearly a year ago). I confess I've only skim-read their latest Economic Commentary but I can't find anything in there that backs the assertion Stuart makes. Here are some highlights that caught my eye;

For 2016, we have also revised down our forecast to 2.2% from 2.3% in June, in recognition that the slow down in the rate of recovery will continue into 2016 as exporting continues to be difficult due to the high pound sterling and because of the lingering effects on Scottish onshore activity of the low price of oil.
[..]
As noted below, the effect of the slowdown in the oil & gas industry due to the low price of oil is also affecting the service sector in Scotland much more than the UK, for obvious reasons. And that is one contributory factor to Scotland’s weaker service sector performance recorded here
[..]
In Scotland, weakness in the service sector has been affected by the onshore implications of the fall in the price of oil hitting business services in particular as well as mining and quarrying.
[..]
The Survey also reveals the impact that the low global market price for Brent crude oil is continuing to have on the Scottish economy, with the performance of oil and gas service businesses dampening results in the Financial and Business Services sector.
[..]
Domestic demand in Scotland and the UK continues to be boosted by low inflation, helped by the fall in the price of oil and some other commodity prices, with the fall in the oil price being key, further boosted by the low price of imports due to the strength of sterling

So whilst there's recognition that there is a positive demand boosting aspect to the fall in oil price, I see nothing there to suggest that it makes "an independent Scotland more economically viable".

The rather obvious point here is that from the low point of now (with oil revenue this year estimated to be only £0.1bn) the economy boosting effects of lower oil price may be net positive - but relative to the indyref case that was presented (assuming £7.9bn annual oil revenue) it's frankly preposterous to argue that the chronic decline in the North Sea oil industry makes "an independent Scotland more viable"

The Masters of Spin

There's a remarkable piece in today's Sunday Times in which Kevin Pringle (the SNP's erstwhile spin-doctor-in-chief) admonishes us silly Scots who keep casting our eyes back, those of us who ponder the fact that we dodged a bullet by voting No in last year's Independence Referendum. He asserts simply:

pointing to glaring inconsistencies between what was said before the referendum would be the case, and what has actually happened afterwards [is] pointless and irrelevant

You've got to admire the chutzpah of a man who can write that statement. It's obvious to even the most casual observer why a cheerleader for the SNP would rather we didn't look back at the case they presented; the SNP will be seeking our vote in May 2016, so of course they'd like us to think it "pointless and irrelevant" that they tried to persuade us to vote Yes on the basis of a false prospectus.

But he doesn't leave it there. He may no longer be employed by the SNP but old habits die hard and a spin-doctor's gotta spin. So - having asserted we shouldn't - he proceeds to cast his eyes back to try and score some rather weak points around risks to HMRC jobs and orders for type-26 frigates. There's an obvious "have your cake and eat it" hypocrisy to this rhetorical ploy and both of these are far more nuanced issues than he suggests - but I don't want to get bogged down in those arguments here. I want to focus instead on the following astonishing statement:

On the back of the plummeting price of oil, Unionist parties revel in the fact that North Sea revenues are only going to be £0.1 billion next year, compared to the £6.8-7.9 billion forecast in the independence white paper.

Of course, it should be pointed out that while the Scottish government’s central assumption was for the oil price to be $110 a barrel at the time of independence, Westminster’s department of energy and climate change predicted prices of $114-127 a barrel over the same period. And the Treasury publishes a monthly summary of figures produced by independent organisations - in May 2014 none of the 22 forecasters expected oil prices to fall to current levels, and 18 expected prices to remain above $100 a barrel in 2015.

Let's put aside the childish suggestion that Unionist parties "revel" in the drop in North Sea revenues and focus on what he's doing here. The first paragraph refers to North Sea revenues, the second talks only of the oil price. He's relying on the fact that the casual reader will accept this elision, will allow North Sea revenue forecasts and oil price forecasts to be conflated into being effectively the same thing. Well they're not, as we'll come on to see.

We need to get one basic point clear first though: the UK Government relies on OBR forecasts and has done since it was established in 2010. The OBR - the Office for Budget Responsibility -  the clue is in the name. If you want to budget responsibly you can't simply ignore it. Needless to say the Scottish Government's Independence White Paper did just that - it ignored the OBR's forecasts for North Sea revenues (whilst relying on them for the base case onshore assumptions)¹.

Now if you read the second paragraph of that Pringle quote quickly you might have gained the impression that the White Paper was using the same assumptions as the UK Government. What he's actually asserting is that the White Paper oil price assumption of $110 a barrel was at the low end of the DECC assumptions that existed at the time. This is correct - I pointed out as much myself a year ago in "Oil & Gas: When Will We Ever Learn" - but it's not the same price assumption as the OBR were using. In March 2013 (fully 8 months before the White Paper was published) the OBR was assuming $97 for 2016-17 (revised to $97.4 in the OBR's Dec 2013 forecast)

But there'a bigger issue here. By focusing the reader's attention on the oil price assumptions he's distracting us from the actual oil tax revenue assumption. What's often overlooked here is that it's profit from North Sea production that is taxed by HMRC² - so to get from oil price to North Sea tax revenue you also have to make assumptions about oil production volumes, production costs (hence profitability) and of course effective tax rates. So there are a lot of other assumptions we'd have to understand before we could judge whether the White Paper was in line with "Westminster" assumptions.

Fortunately we don't need to bother ourselves with the detail, we can cut to the chase by comparing the Scottish Government's White Paper revenue forecasts with contemporaneous OBR revenue forecasts. The chart below does just that: it compares the White Paper scenarios published in November 2013 with the OBR forecasts published in March and December 2013 and March 2014 (6 months before the referendum).

There is no ambiguity here: the White Paper was never using "Westminster" assumptions for oil and gas revenues. The White Paper explained its forecasting approach thus:

"we will plan Scotland's public finances and borrowing requirement on the basis of a cautious forecast for oil and gas revenue" - page 305

You don't need the benefit of hindsight to know that those are the words of a false prospectus; the lower of two scenarios they presented was £2bn- 5bn higher than contemporaneous OBR forecasts.

That's not cautious, it's downright reckless³.

Pringle goes on to point out that nobody forecast a price crash as severe as that we've seen. As with all good spin this truthful observation invites an untruthful inference: if everybody was wrong you can't blame the SNP for being wrong. This is of course nonsense: the SNP used assumptions that were far more wrong than the OBR, at the same time as falsely asserting they were using cautious forecasts.

The fact that they presented two scenarios compounds this deceit. Anybody who understands planning knows scenarios are used to test a plan against a range of likely outcomes. Even a layman reading the White Paper would surely assume that the scenarios represent a reasonable range of probable outcomes. The authors were obviously aware of the OBR forecasts, so the only way using these scenarios could have been justified would have been if they'd labelled them  "optimistic" and "hopelessly optimistic".

The bottom line here is that the shortfall between reality and the White Paper forecasts is £6.7bn to £7.8bn a year. To put that figure in context: £3bn a year is Scotland's share of the UK's total defence budget; our total Education and Training budget is £7.6bn; £7bn is £1,300 for every man, woman and child in Scotland.  Against this figure most other arguments pale into insignificance. Let there be no doubt; if we'd voted Yes the people of Scotland would be facing far worse austerity than we are today. By choosing to continue to pool & share our resources with the rest of the UK, we dodged a bullet.

Mr Pringle and his fellow SNP cheerleaders discourage us from looking back on their false prospectus for one simple reason: if enough people look back and realise how close they came to leading us to economic disaster, they will be the ones getting the bullet come May 2016.

---

For completeness I've updated the graph to show how the OBR forecasts have progressed since the Referendum; nobody will be surprised to learn that they have continued their record of always turning out to have been optimistic. They were wrong, they were optimistic -  but they weren't half as optimistic as the Scottish Government.

For added giggles I thought I'd include what Wings Over Scotland's Wee Blue Book had to say⁴ about the prospects for oil revenues. As I concluded in Wings and His Wee Blue Book of Errors; he was very very wrong indeed.

********
Notes

1. The White Paper mentions the OBR 5 times:

• page 602: explaining that OBR assumptions for UK onshore receipts have been used as the basis for projecting Scotland's
• page 603 (twice): explaining that OBR projections used for reserved social protection spending and onshore GDP
• page 604 and 605: explaining that the OBR projection for the total UK deficit is used for comparison purposes (which is of course inconsistent - if you choose to use a higher offshore projection for Scotland you should compare with a total UK figure using that higher projection ... but we'll let that pass).  

2. All of HMRC's North Sea revenues are based on taxes aplied to profits. Despite its name, Petroleum Revenue Tax (PRT) is a tax on profits arising from individual wells. There used to be a gross revenue royalty but that was abolished in 2002

3. The White Paper goes on to say "Production in Scottish waters could generate approximately £48 billion in tax revenue between 2012/13 and 2017/18 based on industry estimates of production and an average cash price of approximately 113 dollars per barrel" - page 510

4. On page 29 of the Wee Blue Book, having insisted that the UK government has been talking down oil (we now know the reverse was in fact true) he chooses to quote an academic who suggested "an independent Scotland's revenues in 2017-19 would be almost £32bn"

Scottish Government Oil Revenue Forecasts

The 2 minute video here summarises the oil & gas forecasts as produced by the Scottish Government and places them in the context of OBR forecasts that existed over time.  For more descriptive detail see Oil & Gas: When Will We Ever Learn 

If you're on a desktop device you may prefer this version

 

Oil & Gas: Will We Ever Learn?

That the current oil price crash exposes the weakness of the Yes camp’s economic case is undeniable, but those of us who argued against independence on the grounds of economic rationality would do well to avoid gloating. If we were currently experiencing a short-term price driven boom, the economically literate and rational among us would be arguing that we shouldn't make long-term judgments on the basis of short-term price fluctuations.

So instead of over-reacting to today's oil price, let's instead take this as an opportunity to reflect on how the economic case was presented by the Scottish Government and whether the electorate were suitably informed when votes were cast.

First of all it's worth noting that neither side of the Yes/No debate is celebrating the oil price decline. Even if we discount some of the more sensationalist headlines (North Sea Oil Industry Close to Collapse), measured voices such as Sir Ian Wood (North Sea Oil Collapse Fears 'Too Dramatic') and Oil & Gas UK (Oil & Gas UK have warned of up to 35,000) are warning of 18,000 - 37,000 job losses. Whilst the ever excellent David Smith argued in the Sunday Times (Relax: Lower Oil Prices Will Be Good For Growth) that the oil price slump may benefit the UK economy (because the UK is a net importer of Oil & Gas), nobody who cares for those employed in the industry will be celebrating the current market conditions.

Looking back to referendum debate I recall plenty of us complaining about the oil & gas forecasts in the White Paper (alongside many other complaints about the lack of a credible economic case) but hindsight can play tricks on us - so I have revisited the question using contemporaneous data sources.

The first and most obvious point worth making is that nobody predicted a price crash to today's levels. There are a lot of data points on the chart below but the overall message is simple - the price levels used in the White Paper (blue line) were at the high end of available forecasts at the time but no forecasts were as low as the prices we are now experiencing and expecting (the black line).

Full sources and explanations are given at the foot of this post.

Of course there is a very efficient market in oil price futures so we can look back to the time of the White Paper publication and see if the price assumptions used were consistent with market expectation back then.  The chart below shows the expected market price for a barrel of oil in December 2017 based on the Futures Market Price over time.  The blue lines show the $113 assumption used in the White Paper and the White Paper publication date; it shows us that the price assumption used in the White Paper did indeed fairly reflect market expectations at that time.

Of course revenue is a function of both price and production volume, so let's look at revenue forecasts produced at the time of the referendum debate.

In the chart below, blue lines are Scottish Government Scenarios (as per the Oil & Gas Analytical Bulletins in March 2013 and May 2014)  red lines are OBR forecasts, the black line is the actual outcome.  The dotted lines represent forecasts as of 03/13 and the solid lines as of 05/14 (i.e. periods bridging the publication of the White Paper).  The two highlighted data points in 2016-17 are the two scenarios the Scottish Government chose for the economic forecast used in the White Paper.

You can see how these forecasts evolved over time here (> 2 min video blog)

It's a pretty graph, isn't it?  But let's consider what it is illustrating.

• The dotted lines show how dramatically optimistic the Scottish Government scenarios were compared to the OBR at the time - they appear to have simply ignored the OBR forecasts (despite the fact that they have a consistent track record of being overly optimistic) and used a low case that was 60% higher than the OBR forecast
• The solid lines show that when the OBR revised down their forecasts the Scottish Government simply assumed away the downward trend. In fact the Scottish Government introduced a 6th scenario, presumably so that the higher of the two figures used in the White Paper could still be justified

Now let us pause and reflect on this.  The White Paper was produced by the Scottish Government; this means civil servants should have ensured that it didn't become an SNP manifesto or a case weighted unrealistically in favour of independence. Similarly the Oil & Gas bulletins should surely be impartial assessments of the economic outlook we face? It's hard to look at the graph above and not conclude that the scenarios presented in May 2014 were manipulated to try and support the White Paper scenarios.

This civil service failing has been covered by others (notably John McTernan: White Paper Damns Civil Service) and extends well beyond the issue of North Sea tax revenue forecasts - but this graph alone is surely a compelling illustration of the need for an OBR equivalent independent fiscal watchdog in Scotland. Maybe we could call it the Scottish Office for Budget and Economic responsibility and task it with providing SOBER assessments to inform policy makers and votes?

It gets worse; even if we take the Oil & Gas scenarios as objective forecasts produced in good faith, how can the two scenarios chosen for the White Paper be justified? Any business person will tell you that scenarios should be used to provide an illustration of the range of likely outcomes, to stress test the plan and ensure that the a downside scenario can be weathered.

During the Independence referendum the Alex Salmond claimed "There can be little doubt that Scotland is moving into a second oil boom" and there were forecasters who shared at least some their optimism (e.g. the OECD The Price of Oil - Will it Start Rising Again?) so it is perhaps understandable that yes camp pushed for a bullish scenario in the White Paper.

But what about a conservative scenario?  If you produce six scenarios in the Bulletin you should surely include at least one that reflects a worse case than the OBR forecast?  Given the credibility of the OBR within the UK surely at the very least that forecast should be used as a base case?

In effect the Scottish Government White Paper presented two scenarios for North Sea tax receipts: "Optimistic" and "Hopelessly Optimistic".

Look again at the graph above.  The White Paper "low" scenario for 2016-17 is £3.9bn higher than the OBR forecast that existed 6 months before the referendum.  That's more than double, that's £734 per person or (to use the "over 5 years" methodology Alex Salmond used when propounding his Shameless £8bn Lie) that's £19.5bn over 5 years or £3,700 for every man woman and child in Scotland.

Remember: this is not hindsight. There were voices of reason at the time counselling that the Scottish Government’s forecasts were extremely optimistic (e.g. in the FT The Scottish Government is Misleading Scots about Oil) and the figures I'm using above are simply the OBR forecasts that were available at the time - the shortfall between the White Paper "low" scenario and current OBR forecast is even greater.

Some of us argued against independence in part on the basis that an independent Scotland's economy would be over-exposed to this volatile commodity, we argued that the White Paper failed to make an economic case and that the economic risks were not being honestly presented to the Scottish voters. There were many other warnings being offered (e.g. around employment, currency, uncosted White Paper promises etc.) but the current oil price shock certainly provides a dramatic illustration of the point some of us were trying to make.

More thoughtful Yes voters might consider whether countering those rational observations made at the time with the simplistic, projected opinion that we were in some way suggesting Scotland was "too wee, too poor, too stupid" might not have been the most intelligent way to debate the issue. We weren't "talking Scotland down" or suggesting oil was somehow not an asset; we were simply trying to ensure that referendum votes were cast knowing the very real economic risks an independent Scotland would face.

Maybe next time (if there is a next time) we will succeed in having a more rational and informed debate, that those who counsel for rational economic assessments will not simply be shouted down and accused of negative campaigning.

********

Oil Price Chart Data Sources
The black line on the chart below shows the current market expectation based on the Brent Crude Futures market (Futures markets are of course not infallible, but they do provide a truly independent, market based 'Wisdom of the Crowd' forecast as of today).

• The blue line represents the price forecast used in the Scottish Government White Paper published in Nov 13 (both scenarios used)
• The orange figures (2014/15) represent the range of 22 forecasts monitored by HM Treasury as quoted in Scottish Government Oil & Gas Analytical Bulletin May 14 
• The red figures (2017/18) are OBR forecasts as quoted in Scottish Government Oil & Gas Analytical Bulletin March 13 and as published in the OBR Economic & Fiscal Outlook Dec 14
• The Green  figures (2017/18) are figures from DECC as quoted in  Scottish Government Oil & Gas Analytical Bulletin May 14