In the weeks following the referendum on September 18th 2014, many of us who supported a No vote have felt a deep sense of vindication. I of course refer to the oil price, which since June last year has fallen by over fifty percent. One may regard this as nothing more than smug triumphalism. After all, should we not be moving on from the divisive politics of the referendum, accepting the result and working to make Scotland a better place as part of the United Kingdom?
Well, we would be, if only the Nationalists were as well. Not only has the Scottish National Party manifestly failed to respect the result of the referendum, it is still determined to build a country on oil. I refer to Alex Salmond making utterly identical arguments in his demand for Scottish “Home Rule” following the May general election this year. The departed First Minister, in his imagined role as Kingmaker following the general election, has demanded control of “everything except defence and foreign affairs” as the price of his cooperation. Such a definition should immediately alarm anyone who voted against independence out of concern for their pension, their benefits, or healthcare spending, for it demands that all tax revenues raised in Scotland staying would here.
In short, this would mean swapping the Barnett Formula for North Sea oil revenues.
Given the recent falls in the oil price, this should give any reasonable person pause. Despite claims from Nationalists repeated ad nauseam during the referendum campaign that oil revenues are “just a wee bonus”, the Scottish Independence White Paper conceded that oil was worth 10% to Scotland’s entire GDP in 2011-12. Oil was also projected to make up to 20% of an independent Scotland’s tax revenues, in contrast to 1.5% of the UK’s currently.
The prospect of such a volatile commodity making up such a huge percentage of the Scottish budget is frankly horrifying. 20% is hardly “just a wee bonus”: it makes the potential effect of an oil price crash on our public services, like healthcare, education, benefits and policing, potentially disastrous. Total North Sea revenues were over £11 billion in FY 2011-12, falling to £6.1 billion in 2012-13 and £4.7 billion in 2013-14. They have therefore fallen by more than half in just two years. Scottish oil revenues have come in below the Scottish Government’s most pessimistic White Paper estimate by around £2 billion in 2012-13 and over £3 billion in 2013-14.
This was the case before the recent fall in global oil prices: an oil price of $82 a barrel – $28 lower than the $110 a barrel assumed by the Scottish Government – reduces their own forecast of oil revenues by a cumulative total of £8.7 billion over the three years 2016-17 to 2018-19. At time of writing, the price of Brent Crude was at $48.79 a barrel. A drop in the price below $50 a barrel creates an £18.6 billion black hole in the Scottish Government’s assumptions on oil prices. To put this into sobering perspective this means that tax revenues on alcohol and tobacco in Scotland would put more into an independent Scotland’s budget than oil.
That should give us all pause for thought, not least those who favour independence or Home Rule. It is worth noting that during the referendum campaign Alex Salmond declared that the estimate of $110 a barrel was “pessimistic” and looked forward to an “oil bonanza”. I have yet to see any Nationalist square these with their claims that oil is “just a wee bonus”, and I also fail to see why, based on this, we should trust any more of Alex Salmond’s economic predictions, least of all when it comes to such a momentous political decision as Home Rule.
This is not a dry argument about oil revenue: these numbers represent the ability – or otherwise – of a fiscally-independent Scotland to pay for doctors, nurses, teachers and other services on which the public rely. One may argue that this is a good argument for devolving control of petroleum industry taxes to the Scottish Government so that they can make tax cuts to preserve the industry and jobs. However, to cut taxes on the oil industry would only further decrease oil revenues!
It is increasingly clear that the vote to stay in the stability and security of the UK was the best choice for Scotland. The vastly larger and far more diverse tax base provided by the rest of Britain allows us to avoid this sort of financial shock. This is the professional opinion of a figure as illustrious as Mark Carney (the same person who last year Nationalists trusted enough to want him dictate Scotland’s fiscal policy through a currency union). The Bank of England Governor said that the oil price change is “a negative shock to the Scottish economy which is substantially mitigated by the fiscal arrangements that exist in the UK – the automatic stabilisers that exist – less revenue taken out of Scotland, more spending into Scotland. And by the nature economic and financial union that exists in the UK.”
The past couple of months have therefore been the ultimate vindication of Scotland remaining in the Union, yet despite the obvious volatility Alex Salmond is still determined to cast this security away and try to build a country on oil. As pointed out, his dream of “Home Rule” would mean swapping the Barnett Formula for the oil revenues. The same Barnett Formula that, according to the Scottish Government’s own GERS Report, in 2012-13 gave Scotland 9.3% of all UK spending when only 9.1% of total UK tax revenues came from Scotland.
Given the choice of the Barnett Formula or oil revenues, the decision should be obvious to even the most fervent Nationalist ideologue. As I have already pointed out, swapping Barnett for oil is a potentially disastrous state of affairs given current prices: Barnett has led to public spending per head being typically 20% higher north of the Border than in England, but Fiscal Affairs Scotland has already said that swapping it for oil revenues could lead to a “Negative Differential” costing Scotland almost £5 billion. It is worth noting that FAS’ analysis was made when oil was worth $85 a barrel. Since then the price has halved.
Indefensibly, the SNP have been aware of this for years. In 2013, a Scottish Government document written by John Swinney to his ministerial colleagues was leaked. It said that volatility in projecting North Sea oil revenues created financial uncertainty, and that an oil fund could increase stability but would have to be funded by spending cuts. John Swinney’s exact warning to his colleagues was that Scottish welfare costs might become unaffordable if oil revenues fell. They have of course since fallen by far more than anyone could envisage at that time. Did they intend this paper for public consumption? Of course not, that would put their irrational, ideologically-driven crusade at risk.
There are no doubt those who will say that we should wait to see what the oil price is like in a year. After all, it may well rise. But it may well fall again, and that is exactly what Better Together and the No campaign were arguing against: we cannot base our budgets on the revenues from such a volatile commodity, for a rise in the oil price one year and a fall in it the next may well be the difference between quality public services, and none at all. Additionally, there are already signs that the oil price will not return to the rosy days of $110 a barrel: the current fall is the Saudi response to the Americans overproducing shale oil to drive the price down as a means of sanctioning Russia over Ukraine. The Saudis are overproducing in turn for two reasons: to hurt Iran, and to reduce the oil price to the point that the complex process of shale oil extraction is unprofitable, thus securing their slice of the oil market. Saudi economists have predicted on two occasions that oil will “never again” return to $100 a barrel. A far more likely scenario is the Saudis stabilising it at a point where shale is unprofitable but still allows them decent profits from conventional drilling. This would probably around $50 to $60 a barrel, the figure projected by BP.
Beyond oil, Home Rule carries all the other financial perils of independence. For example, Home Rule would entail the full devolution of Corporation Tax. If the SNP were to hold to the promise they made during the referendum campaign to cut Corporation Tax to attract business, then the “Race to the Bottom” that was warned about during the referendum campaign will become real. Scotland would inevitably lose this race since the rest of Britain has a much broader economy and so can absorb the greater tax revenue loss from cutting taxes. The hole in Scotland’s finances created by such tax cuts, and the fall in oil revenues, would need to be plugged by borrowing. Since Home Rule implies the end of risk-sharing across the United Kingdom, this borrowing would have to be done by Holyrood, a government with no credit history and its finances in, if this were not already obvious, a parlous state. With this and a borrowing requirement so huge, there would be no way to get loans on the international markets at anything other than enormous rates, rates far in excess of anything the UK as a whole has to pay now.
What do Nicola Sturgeon and Alex Salmond say to all this? Why, nothing of substance, as usual. What else can we expect of ideologues? While Ruth Davidson points out that relying on oil “means that the £18.6bn black hole currently borne on UK-wide shoulders would fall solely on Scotland, which would mean cuts to every school, every hospital and every service that we rely upon in this land”, Nicola Sturgeon says only; “I believe and always will believe that the best way forward is to be in charge of our own resources, so we don’t have to be subject to the kind of cuts coming at us from the UK government, but instead could be masters of our own destiny.” Stuff to tug at the heartstrings indeed, but being the master of one’s own destiny means nothing when that destiny is poverty.
Therefore, if we are to truly move on from the referendum, then the Nationalists should drop every single argument they have for Home Rule right now. If the SNP had a shred of integrity it would admit that Home Rule is not a road Scotland should be going down if it wishes to be a socially-just, wealthy nation; it would admit that its oil predictions were wrong; and it would admit that its rhetoric surrounding greater public spending in a fiscally-independent Scotland was wrong. Instead it would seek to use its new powers and the fiscal stability provided by the Barnett Formula to create the socially-just nation it supposedly envisions, as a part of the United Kingdom. But it won’t do any of those things. It is not in the nature of ideological parties to do such things. They would rather see Scotland burnt to the ground if only they could be kings of the ashes rather than admit that they have always been walking along the wrong road. The SNP lost the referendum because they could not give guarantees that pensions would be safe, that welfare spending would be protected, that the NHS would be safe, and that Scotland would have fiscal stability. We must pray that these same concerns will save us from Home Rule as well.