By Martin Kelly
A newly independent Scotland could be in a position to establish a sovereign wealth fund from its oil and gas revenues within a year of independence according to a report published by a group of world renowned academics, economists and businessmen.
The Fiscal Commission Working Group (FCWG) has recommended that in the event of independence, a short-term stabilisation fund should be set up by the incoming Scottish Government with a view to the eventual creation of a long-term savings fund.
The FCWG is a sub-group of the Council of Economic Advisers which is helping to shape the development of a robust fiscal and macroeconomic framework for an independent Scotland. Its members are Professors Andrew Hughes Hallett, Sir Jim Mirrlees, Frances Ruane and Nobel winner Joseph Stiglitz. The FCWG is chaired by Crawford Beveridge.
Under the criteria suggested by the Fiscal Commission it is likely that the first investments into the savings fund could be made by the end of the decade and perhaps as early as financial year 2017/18.
The report has been welcomed by the SNP which has long called for such a fund to be created to allow future generations of Scots to benefit from the billions currently being generated from north sea oil and gas.
The economic rationale for establishing such funds is powerful and they have been successfully implemented in the vast majority of natural resource rich countries, with the UK being a notable exception.
In a stark reminder of the mismanagement of the resource by successive UK governments, the SNP today revealed that the only other major oil producing country in the world that doesn’t have an oil fund is Iraq – but it does have a form of investment through its Development Fund.
Commenting, SNP MSP for Aberdeen Donside Mark McDonald, who is also a member of the Scottish Parliament’s Economy, Energy and Tourism Committee, said:
“This expert report sets out a framework that will help to maximise the economic opportunity that Scotland’s oil and gas wealth presents, and ensure that it provides a lasting benefit for future generations. The Fiscal Commission make clear that investments could be made shortly after independence, potentially as early as 2017-18.
“The report highlights that if oil resources had been invested into a savings fund in the past then the country could now have accumulated financial assets of between £82 billion and £116 billion, as opposed to a share of the UK’s huge debt.
“Anti-independence politicians now acknowledge that some of the North Sea’s vast revenues could and should have been saved in an oil fund.
“But successive Westminster Governments have used this resource as a short-term cash cow to be squeezed at every opportunity to prop up the Treasury’s crumbling books. Apart from the UK, only Iraq among the major oil producing countries doesn’t have an oil fund, and even Iraq has a form of development fund.
“The truth is we are still less than half way through the wholesale value of oil assets to be extracted from the North Sea. We know Norway only established its oil fund in the 1990s – when the fiscal circumstances allowed – and this has grown to become the largest sovereign wealth fund in the world.
“With the right handling, Scotland’s oil and gas industry can continue to thrive for many decades to come – and will best do so in an independent Scotland.”
However the plans for an oil fund were dismissed by former UK Chancellor Alistair Darling. Responding to the report, the Labour MP, who leads the anti-independence campaign Better Together said:
“Currently oil revenues make up just 2% of the UK tax take, but an independent Scotland would rely on North Sea revenues for anything up to 20% of our tax revenues. So spending on public services would depend on the ups and downs of world oil prices.
“The solution to this, say the SNP, is to establish this stablisation fund.
“They suggest planning public finances on the basis of a particular oil price level of production and then, in the years when the oil price exceeds that level, save some of that money to fill the gap in public spending that we would face when the price drops.
“It sounds fair enough until you remember that even in the years of highest oil prices in the last decade Scotland has still run a fiscal deficit.”
North sea oil has been at the centre of the independence argument for decades, with pro-Union parties claiming it is running out and that oil price volatility would harm the Scottish economy. However earlier this year former Labour Chancellor Denis Healey admitted that Labour had deliberately underplayed the true value of oil in the seventies in order to thwart the rise in support for the SNP.
The Scottish government’s own estimates, based on a conservative price for a barrel of oil of $100, suggests that there is at least £1.5 trillion worth of oil and gas still to be extracted.
Despite hitting a low of $90 in June 2012, the price of a barrel of Brent Crude has remained comfortable above $100 since – averaging easily $110. Today’s closing price for the commodity was $109.10.