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.

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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

 

The McCrone Report

There is a point in any Scottish independence debate where - having pointed out the other factual or logical flaws in the pro-independence logic -  the McCrone report gets raised.  I recommend reading this independent newspaper article if you're not familiar with the story but do also scan the "report" itself.

This isn't really about Oil & Gas; it's a "reason why we can't trust Westminster"

Politicians choose not to leak a confidential memo that would play into the hands of their political opponents shock.

I find the Yes campaign's position on this slightly bewildering. Apart from anything else the "report" was a confidential memo speculating about the future; it's subsequently gained a mythical status which has given it a somewhat over-blown significance.

Update 16/07/2014: In fact at the Royal Society of Edinburgh in a public discussion on 29 January 2014 Professor McCrone was questioned about the suppression of his "report"; his response is enlightening: (Emphasis is mine)

• "Professor McCrone pointed out that this report was a briefing paper written when he was a civil servant.  Briefing papers by civil servants, especially those prepared in advance of a possible change of government, are never published. The paper had not been suppressed"

I strongly recommend you watch this > The McCrone Report: In his own words

 

It was one man's view and in fact offers a far more balanced and nuanced perspective than many seem to think .  But putting that aside I still get that something bad happened, I get that it's something we as a nation can be rightly pissed off about; but I don't get how the politically expedient suppression of a report (or more accurately maintaining the confidentiality of a memo) 39  years ago leads to the conclusion that we should vote for Independence now.

I've talked elsewhere on this blog about the concepts of inherited responsibility and guilt.  Are we really arguing that an entire political structure can no longer be trusted because of what happened in 1975? Are we expected to believe that some evil miasma seeps from the Palace of Westminster's limestone walls, infecting any who enter there with an uncontrollable desire to screw over the people of Scotland?

Sorry.  I'm capable of bearing a grudge as much as the next man but I can't extrapolate from the failings of some politicians 39 years ago to the conclusion that we can't trust an entire political system now because of where it's housed.  A Scottish parliament will still be populated by the same political class; politicians won't stop being politicians just because there are less of them.  Unless you believe that there's something intrinsically different about Scottish politicians?

But even if you don't share my emotional reaction on this, there's a more fundamental reason why to vote Yes "because of McCrone" is a bewildering thing to do.  As argued extensively on this blog, separating Scotland from the Union today sacrifices many tangible benefits of union - and for what? A desire to punish the rest of the UK, to ensure they inherit the guilt of those historical political failings? Even if you think that is a reasonable position (I certainly don't) it's still perverse to vote Yes; because it's a vote to "cut off the nose to spite the face", because the loss of benefits of union punishes us, the Scots most.

Did you scan the original document?  Because funnily enough if you actually read the McCrone report there's plenty in there about the downside of independence. for example;

"This is partly a question of the scale of the Scottish economy, but more of the extent to which it has become integrated with that of the rest of the UK [...] such measures would risk retaliation from England which, given Scotland's close trade ties with England, could cause damage far in excess of any benefit that may be hoped for. Such policies would also be incompatible with continued membership of EEC and withdrawal [...] would clearly have very damaging consequences [...]
But the Scottish labour market is so closely linked with that of the rest of the UK that it is hard to see how real earnings could be adjusted downwards without giving rise to the most serious difficulties. 
For such a small country heavily dependent on international trade, devaluation would, of course, have serious inflationary consequences since all imports would rise in price".
McCrone Report, 1975

Oil & Gas (Part II): The Oil Fund

In Oil & Gas (Part I): For Richer, For Poorer I tackled the question of how Oil & Gas revenues have been shared historically  between Scotland and rUK (with Scotland an integral part of the Union).

I argued in that post that historically it would actually be completely reasonable to have shared our Oil & Gas revenues on an equal per capita basis with rUK (as that's what being in a Union means); in fact the amount of public spending per capita that Scotland receives is greater than rUK by an amount that is equivalent to the greater tax revenues Scotland generates if you allowed us to keep our geographic share of oil.  On that basis I conclude that historically Scotland has not been 'done out of' our fair share of Oil & Gas revenue and has in fact done pretty well out of the Union (at least in this narrowly defined economic sense). I'm certainly not alone in reaching that conclusion.

So let's move on to another subject that is often raised when the Oil & Gas topic is discussed.

The Oil Fund (or Should've, Would've, Could've)
One of the arguments put forward by the Scottish Government is that we should have had an oil fund, that if we had we'd now be as wealthy as Norway.  That's all well and good but - at the risk of stating the obvious -  to have created an Oil Fund we'd have needed to not spend the money.  We (the UK) did spend the money and - as we've shown in Part I - Scotland received it's fair share of that money (actually more than its fair share if you consider fair within the Union would mean to share equally on a per capita basis).

Norway founded their "Petroleum Fund" in 1990 and it's informative to consider some of the public spending choices they made as a result. Let's take just one example, their health care system

• The healthcare system is not free at point of use. According to NHH:
• Consultations at general practitioners (GP) involve the patient’s charge: the typical fee is [£14] during the office hours and [£23] for an evening appointment.
• Costs related to visits to specialists, dental care and radiology tests are entirely supported by the patients

• The following comparisons are taken from a recent Commonwealth Fund Report
• Adults able to get same/next-day appointment when sick: UK 70%, Norway 45%
• Waited 2 month's or more for specialist appointment: UK 19%, Norway 31%
• Experienced access barrier because of cost: UK 5%, Norway 11%
• Public view of health system "needs to be completely rebuilt": UK 3%, Norway 12%

There's more on this topic in this Blog from a Norwegian Perspective where the blogger complains about the high cost of living in Norway. So I checked - Norway vs UK cost of living comparison - and sure enough the cost of living in the UK is about 30% lower than Norway.

Now don't get me wrong - the OECD better life index shows Norway comfortably out-performing the UK on most measures.  My point is not that Norway made bad choices but rather they made tough and at times unpopular choices to get to where they are.  It's all very well - with the benefit of 20:20 hindsight - to say "we could have had an oil fund". The question is not who is saying that now but who was saying that then; can we really assume that an independent Scotland would have made different choices?

So to see if we might have done I checked through the SNP manifestos back as far as 1997 (there is a limit to the suffering I am willing to go through for this blog and that was it).

I found one mention of the possibility of a Scottish oil fund in the 2005 manifesto; nothing before and nothing after. Norway is mentioned once in the 1997 manifesto and only reappears in 2007 (when it is mentioned 5 times).  I wondered if the manifesto check might be a bit too narrow an approach; so I Googled for mentions and found only a handful of stories prior to 2009, nothing prior to 2005.  Then it occurred to me that - given how relatively recently digital media has come all pervasive - Google is not a great historical news research tool.  So then I checked Hansard.  Well, there weren't many mentions there either and the earliest was an early day motion in January 2002.  To put the level of noise made about an oil fund into context: my Hansard searches turned up 68 results relating to "Oil Fund" compared to 674 results relating to "Scottish Gaelic".

I think we can conclude that the Oil Fund about which the SNP are so keen to talk now wasn't very near the top of their priority list when it could have actually made a difference in the 1990s.

So it's hard to argue that an independent Scotland would have had the political vision and conviction to make the sacrifices required to build an oil fund; we can't credibly say "we'd have had an oil fund if only it hadn't been for pesky Westminster". We didn't make the sacrifices at the time, we spent our share of the money. Should've, would've, could've.

Of course all of this is of academic interest only. The past is the past; Time's arrow flies and we can only change what's in front of us.

So what relevance is the Oil Fund debate to the future? Vote for independence and we will have an oil fund, right? Well, not quite.  The relevant passage from the White Paper is extracted below

Let's just pick out the key words: "will be started once Scotland's overall budget deficit is reduced to below the level of long-run economic growth and when debt is on a downward trajectory". That hasn't been the case for any of the last 10 years and it's hard to seeing it being the case for an independent Scotland any time soon.  If there is an opportunity to build an oil fund in the future then that opportunity will exist for the UK as much as it would for an independent Scotland. It's not an independence issues, its a broader question of political will and vision, of whether "we" would be willing to sacrifice "jam today" if we face the choice again.  For reasons outlined elsewhere in this blog, the economic capacity to build an Oil Fund in the future is more likely to exist for Scotland as part of the United Kingdom than for an independent Scotland no longer enjoying the economic benefits of Union.

I think we can conclude that the Oil Fund question is a bit of a red-herring in the independence debate.