Thatcher and North Sea oil – a failure to invest in Britain’s future

Had Thatcher been a truly visionary politician, she would have established a wealth fund for the oil windfall, not squandered it on tax cuts and current spending.

Margaret Thatcher was undoubtedly a transformative prime minister. The only peacetime premiers who might be said to have had a similar lasting impact on British politics are the Victorian titans Gladstone and Disraeli, and Attlee, who led the great post-war Labour government

But whatever else might be said of Thatcher’s record one thing seems undeniable. She was not an investment prime minister. She may be credited by David Cameron for having made Britain great again following the malaise of the 1970s but she failed – and spectacularly so – to invest in Britain’s post-Thatcherite future. As capital spending plummeted, our national infrastructure was left to rot. Public services in particular were starved of resources. Most seriously her governments did little to help find future employment for those industries deemed beyond the pale of the Thatcher revolution. 

But nothing better illustrates her failure to invest in Britain’s long term future than her mishandling of the giant windfall she was gifted on entering Number 10 from booming North Sea oil revenues.

There is no doub that oil played a big part in bankrolling Thatcher’s agenda and in allowing Britain to address a chronic balance of payments problem that had besieged post-war government (Tony Blair said in 1987 that North Sea oil was "utterly essential to Mrs Thatcher’s electoral success"). But history should also record that Thatcher missed a trick in not diverting some of the proceeds of oil revenue into an oil fund, like Norway and others did. Instead she used the lot to support current spending, including covering the costs of large-scale industrial restructuring and funding expensive tax cuts to woo middle England.

And what a lot it was. The table below shows government tax receipts from the UK Continental Shelf since 1980 where the numbers have been rebased to show receipts in real terms, expressed in 2011 pounds. In the years between 1980-81 and 1989-90, the Thatcher governments received a staggering windfall of £166bn. 

Total North Sea Revenue: UK 1980-81 to 2010-11 in real terms (£2011)


Source: Scotland's Choices McLean, Gallagher and Lodge 2013

Oil revenues were significant in the 1980s for two reasons. One was that the price of oil was at a real-terms historic high, after two political shocks in 1973-4 (caused by the Arab-Israeli war) and 1978-9 (caused by the Iranian revolution). In 1979 the marker oil price reached a peak of US $93 per barrel at today’s prices. This price has only been exceeded twice in history: once at the dawn of extraction in the 1860s, and once in 2007. The other was that North Sea production came on stream rapidly, with the easiest fields, of course, being exploited first.

Now, no one is suggesting that all oil revenue should have been put away for a rainy day just that some of it should have. To think through what might have been, the Scottish government published a report in 2009 which considered "how much a hypothetical UK Oil Fund would have been worth had the UK Government invested a proportion of oil tax revenue over the past three decades". The answers, on three different assumptions about the annual investment, and three different assumptions about the nominal rate of return, are shown below:

Value of a hypothetical Oil Fund for UK (2008-09), on assumption that given percentages of North Sea revenues had been allocated to it since 1980.

Building up an endowment is something politicians would often agree is a good idea. But they almost never do it (we don’t for instance have a real National Insurance fund but rather a pay-as-you-go system). The reason is very simple. A politician in a democracy must be re-elected in, at latest, five years’ time. An endowment must be built up, unspent, for much longer than that if it is to yield anything worth having.

Undoubtedly there would have been fiscal consequences had Thatcher opted for an oil fund: after all, you can’t spend and save at the same time. Nevertheless, as these figures show, if just 10 per cent of UK tax receipts from the North Sea had been put into an oil fund starting in 1980 and continuing until 2008, and if the nominal return had been 3 per cent, the value of the fund would be £24bn per annum. Twenty per cent of oil revenues on a return of 5 per cent would have created a pot of £66bn per annum. The failure to create such a fund is brought home when you consider what it could have been spent on. To give one example, hundreds of thousands of new houses could be built to replace the housing stock Thatcher ran down through her iconic policy of selling council houses. We might not face the housing shortage crisis we do today.

The decision to treat tax receipts as a windfall to set against current expenditure was a major policy mistake. Oil and gas in the North Sea are part of the nation’s capital stock. To tax this stock and spend the money in a flow of current expenditure is to deplete the stock. The lesson from history is that tax proceeds on capital receipts should be reserved in some form for major investment projects, something that might be borne in mind should shale gas generate significant revenues.

Had Thatcher been a truly visionary politician, she would have done more to use the the riches from North Sea oil to not only rescue Britain from her troubled past, but also help her be great in the future too. 

Guy Lodge is associate director at IPPR. He is co-author with Iain McLean and Jim Gallagher of Scotland's Choices: the referendum and what happens afterwards published on April 18th by Edinburgh University Press.


A picture taken on 11 June 1984 shows a tanker taking on oil from a loading bay at the Statfjord A-platform in the North Sea. Photograph: Getty Images.

Guy Lodge is associate director at IPPR. He is co-author with Iain McLean and Jim Gallagher of Scotland’s Choices: the referendum and what happens afterwards and with Anthony Seldon of Brown at Ten.

Photo: Getty Images
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Autumn Statement 2015: George Osborne abandons his target

How will George Osborne close the deficit after his U-Turns? Answer: he won't, of course. 

“Good governments U-Turn, and U-Turn frequently.” That’s Andrew Adonis’ maxim, and George Osborne borrowed heavily from him today, delivering two big U-Turns, on tax credits and on police funding. There will be no cuts to tax credits or to the police.

The Office for Budget Responsibility estimates that, in total, the government gave away £6.2 billion next year, more than half of which is the reverse to tax credits.

Osborne claims that he will still deliver his planned £12bn reduction in welfare. But, as I’ve written before, without cutting tax credits, it’s difficult to see how you can get £12bn out of the welfare bill. Here’s the OBR’s chart of welfare spending:

The government has already promised to protect child benefit and pension spending – in fact, it actually increased pensioner spending today. So all that’s left is tax credits. If the government is not going to cut them, where’s the £12bn come from?

A bit of clever accounting today got Osborne out of his hole. The Universal Credit, once it comes in in full, will replace tax credits anyway, allowing him to describe his U-Turn as a delay, not a full retreat. But the reality – as the Treasury has admitted privately for some time – is that the Universal Credit will never be wholly implemented. The pilot schemes – one of which, in Hammersmith, I have visited myself – are little more than Potemkin set-ups. Iain Duncan Smith’s Universal Credit will never be rolled out in full. The savings from switching from tax credits to Universal Credit will never materialise.

The £12bn is smaller, too, than it was this time last week. Instead of cutting £12bn from the welfare budget by 2017-8, the government will instead cut £12bn by the end of the parliament – a much smaller task.

That’s not to say that the cuts to departmental spending and welfare will be painless – far from it. Employment Support Allowance – what used to be called incapacity benefit and severe disablement benefit – will be cut down to the level of Jobseekers’ Allowance, while the government will erect further hurdles to claimants. Cuts to departmental spending will mean a further reduction in the numbers of public sector workers.  But it will be some way short of the reductions in welfare spending required to hit Osborne’s deficit reduction timetable.

So, where’s the money coming from? The answer is nowhere. What we'll instead get is five more years of the same: increasing household debt, austerity largely concentrated on the poorest, and yet more borrowing. As the last five years proved, the Conservatives don’t need to close the deficit to be re-elected. In fact, it may be that having the need to “finish the job” as a stick to beat Labour with actually helped the Tories in May. They have neither an economic imperative nor a political one to close the deficit. 

Stephen Bush is editor of the Staggers, the New Statesman’s political blog.