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Friday, 17 January 2014

Was the UK government’s use of North Sea Oil a scandal?

Aditya Chakrabortty of the Guardian thinks so, as do many on the left. The evidence appears at first sight quite strong, if we compare the UK to Norway. The Norwegian government invested the proceeds from its share of North Sea oil in a sovereign wealth fund, and as a result each Norwegian citizen is currently about $150,000 richer. The fund holds on average 1% of the world's shares. In contrast, there is no equivalent UK sovereign wealth fund, but just a lot of UK government debt. QED?

Not so fast. The opposing argument can also be stated in an equally compelling way. Why should the government decide on what to do with the oil revenue? The democratic thing to do with the money is to give it to the people, and they can decide what to do with it. To the extent that they choose to invest it, so the argument goes, individuals are much better at making good investment decisions with their own money than the government is. Seen this way, the complaints from the left are just another example of the paternalistic belief that the state knows better what is good for people than people themselves. What Mrs Thatcher’s government did was allow individuals to create their own wealth from North Sea Oil revenues, if they so wished.

There are essentially two issues here: one involving distribution between generations, and the other distribution between individuals. Few would argue that the generation who paid taxes in the 1980s deserved exclusive rights to the benefits of North Sea Oil: most would agree that this resource should also benefit future UK generations. Now the current generation could look after future generations by investing rather than consuming a large part of the revenues. The standard macroeconomic model assumes this happens to some extent (agents care about their children etc), although in a way that heavily discounts the welfare of future generations. Did they do this?

It is difficult to know for sure, but when I looked at the evidence from current accounts and net national wealth here, it was hard to believe that most of the UK’s North Sea Oil money was invested. So on this occasion at least, the Norwegian government appears to have looked after the interests of future generations rather better than the average 1980s UK taxpayer did. Whether that is because these taxpayers were selfish or badly informed I have no idea. (For a fascinating account of how a sovereign wealth fund might be useful in a world with selfish agents and animal spirits, see these papers (pdf, pdf, pdf) by Roger Farmer.)

The other problem with the defence of the UK government’s approach is more straightforward. If North Sea Oil revenue was used to reduce taxes, this means that the revenue was distributed unequally rather than democratically. Those who didn’t pay any taxes at the time received nothing. Those that paid the most taxes, which of course means those with the highest incomes, received most. An alternative would have been to distribute equal oil ‘dividends’ to each citizen, for example as the US state of Alaska has done. (For more general discussion of how best to handle resource discoveries, see some of the papers produced by OxCarre.)

So was the UK government’s policy a scandal? One definition of scandal is “an action or event regarded as morally or legally wrong and causing general public outrage”. Well, general public outrage it did not cause: giving the majority of people at least some money rarely does, and that those who were better off got most was a feature of the decade. On the other hand the fact that so little of the wealth was left for future generations, in contrast to the ‘statist’ Norwegian alternative, does seem to pose serious problems for neoliberalism, as well as the core intertemporal macroeconomic model.


  1. There are more problems with not putting the money in a sovereign wealth fund. Look at The Netherlands. The first of course is Dutch disease. Another is playing out in The Netherlands right now, namely the problem of addiction and withdrawal syndrome. At some point, the flow of money will need to decrease, either because the oil runs out, or a problem arises with the winning. In The Netherlands the problem is that the winning of gas leads to an exponential increase of earth quakes in the northern region. So the government is forced to reduce the winning of gas. Of course much too little and much too late. And losing the extra billions will mean more austerity (because Greece, bla bla bla). With a sovereign wealth fund there had been no dependence of the budget on the gas , and it would been pretty easy to reduce the winning of it. If that isn't addiction.

  2. «If North Sea Oil revenue was used to reduce taxes»

    Yes, but that is an incomplete account.

    The Scottish oil generated *2* flows of revenue: the first is the one mentioned, directly into the public account, allowing a much looser *fiscal* policy (taxes and/or spending to be higher) than otherwise. In the UK this took many forms, one of them for example privatisations (like Right-To-Buy) at very favourable prices for friends of the governing party.

    The second revenue flow went instead to the private sector as the oil substituted for imports and for 25 years generated significant export revenue.

    As Tony Blair pointed out in 1987 the second flow of revenue allowed governments for 25 years to run a wildly looser *credit* policy that would have been otherwise possible (just like pumping out liquidity from Saudi and Chinese "savings" reservoirs allowed the USA to do much the same).

    Those governments used that much looser credit policy to massively redistribute income from labour to property interests, and in a "progressive" way: the bigger the property, the bigger the redistribution to the rentier owning it.

    Even worse, it communicated very clearly to potential entrepreneurs that investing in capital for business development is stupid and risky compared to the much safer and higher profits from government-guaranteed property capital gains. This generated a boom in employment in property related services, with many UK high streets filling with luxurious looking "property shops" and little else.

    «there is no equivalent UK sovereign wealth fund, but just a lot of UK government debt. QED?»

    Again, the private side matters a great deal because there is a lot of UK private debt too.

    There are also a lot of UK private foreign assets too, but: the distribution of debt and assets are very different, and Scottish oil has not improved the balance as much as investing it would have.

    «the Norwegian government appears to have looked after the interests of future generation rather better than the average 1980s UK taxpayer did.»

    There is a switch here between «Norwegian government» and «UK taxpayer». I would think that it was Norwegian *voters* who consistently endorsed spreading the benefits of their windfall over time, as it was UK *voters* (in particular South East swing voters) who consistently voted for higher asset prices now now now and lower wages...

    Just like in many anglo-american culture countries most (swing) voters fully endorsed the dream of a plantation economy with themselves as the ladies and lords of the manors, and perhaps they did not realize that they were in effect ruthlessly demanding to asset strip themselves and their countries. Future historians will probably deplore that as Tony Blair wrote in 1987.

    «Whether that is because these taxpayers were selfish or badly informed I have no idea.»

    Either way it was democracy in action. If voters are selfish or believe acritically bad information then they or their children end up paying the price: democracy is not about politicians being accountable, as the myth goes, it is about making the voters accountable for their voting choices.

    «Those that paid the most taxes, which of course means those with the highest incomes, received most»

    But some Conservative politicians like IIRC George Osborne claim that a significant part of Scottish oil public revenue was not used to cut taxes for the most productive South Eastern taxpayers but instead was wasted on benefits for Northern parasites to avoid widespread social disturbances. And the Blair/Brown government stealthily introduced tax credits for low income workers, which have had a really positive impact even if implemented awkwardly. But I suspect that on balance either spending was not as significant as investing :-) in tax cuts for the highly productive South Eastern high income property rentiers and finance operators.

  3. I don’t see the oil issue as a left versus right issue in the UK. Rather it is a Scotland versus rUK issue.

    Norway and Scotland are both fairly egalitarian countries of around 5 million people. The main difference is that Scotland is part of a much less egalitarian state of 60 million people. It is sometimes said that Scotland is the only country to strike oil and get poorer. That is an exaggeration, of course, but one with enough truth that oil is one of the more emotive issues in the independence debate. One of the biggest questions in this debate relates to how much oil is left in the North Sea. More oil left makes an independent Scotland more economically viable. Predictably, the truth about this is now lost in a propaganda war.

    Nevertheless, despite the egalitarian issue, I think it is unfair to blame the lack of a UK sovereign wealth fund entirely on the political right. According to Wikipedia, the first UK oil was extracted in 1975 – when there was a Labour government. Also, Labour came back to power in 1997. If they had set up a fund even in 1997 then we would now have had that fund for 17 years out of the 39 years of oil production. The oil price has been significantly higher in recent years than in the period between 1987 and 2001, so the revenue per barrel would have been higher in recent years than in much of the earlier period (although production did peak in the late 1990s).

  4. One problem that is a common fault of centralised government is the amalgamation of revenue into a single amorphous pot. This lack of transparency allows for a huge waste of resources, and if it isn't wasted, why do they need to hide it?

    Switzerland links specific taxes to specific spending plans - so that VAT and tobacco taxes are spent on old age pensions. Not only that, but citizens themselves are polled on whether specific taxes should be introduced or not - which is why when the politicians wanted to introduce Capital Gains Tax for individuals, the popular vote rejected this and so there continues to be no CGT for private individuals in Switzerland.

    If UK taxes had been transparent and individually earmarked, perhaps North Sea Oil revenues would have been better used; perhaps less money would have been wasted on pet projects; perhaps inefficient contract management might have been avoided.

    David Cameron has said he wants Britain to be like Switzerland and Norway; but maybe he's just saying that and doesn't include setting up a Sovereign Wealth Fund like Norway has done or adopting popular democracy and democratic taxation as Switzerland has done.

  5. Another aspect of this is presumably oil revenues per capita were a lot higher for Norway than UK. That could go some of the way to explaining grumblings from the left or wherever else.

  6. Britain has/had a mountain of gold looted during its colonial heyday. So there was no economic urgency to create and manage SWFs. The core issue now should be over the division of this gold in case Scotland votes for independence.

  7. «the first UK oil was extracted in 1975 – when there was a Labour government.»

    This is the graph:

    «Also, Labour came back to power in 1997. If they had set up a fund even in 1997»

    And perhaps lost all subsequent election because of the hatred of South East rentier swing voters?
    No Labour government has dared to abolish Right-To-Buy, nor to stop bubbling up house prices in the Soth. What South East rentier swing voters want is abundantly clear. In an interview with Andrew Marr there is a delightful anecdote about Tony Blair:
    «First, on the morning of 12th May 1994, Smith, then party leader, had a
    massive heart attack in his London flat, and died. There was widespread
    shock and public mourning, but not everybody thought Smith a political genius.
    Very shortly before his death, I happened to have been in company in a
    Scottish pub with Blair. He believed that Smith, for all his moral
    integrity and popularity, never understood the English south and was
    therefore likely to be a failure in the forthcoming election.»

    If this recollection is accurate and together with his 1987 LRB piece my deduction is that he had a very cynical view of South East voters, one that got him to win several elections.
    However when I mentioned this on another blog someone pointed out that his 1997 victory was done with much the same numbers that polls had given to Smith...

    BTW, I remember reading a report of a speech given by Gordon Brown shortly before becoming prime minister, at a dinner before the great and good of the City (it may have been a Lord Mayor's). The theme of the speech was that he was no longer a dour, moralistic, conservative, egalitarian, Scottish bore, and that they could trust him to be Prime Minister and look after their interests because living for a long time in the South and working in in government had thoroughly corrupted him as they were, and I remember that he rather insisted on using the word "corrupted" instead of something like "softened"... Quite amusing. :-)

  8. Slippery externalities?

  9. "general public outrage it did not cause" - as "Jamie" above noted, this is more a Scotland vs rUK, than a Left v Right issue and in a Scottish context whilst there hasn't been outrage, there's definitely been and remains a high degree of resentment at the extent to which this once in a millenium opportunity has been squandered. Indeed, this has informed a lot of SNP and pro-Scottish independence support, neither of which typically figure in "national" i.e. London-centric political debate or reporting.

    Besides, to note North Sea Oil made a major, subsidising contribution to Thatcherite, then Blairite era economic policies would be to deviate from the dominant political narrative, especially when it concerns the "wonders" of the former. That aside, I read this post as being more than a tad Troll-like.

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  11. there never was enough oil to export to asia


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