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.

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Five of Scotland’s most exciting general election battles

Will unionists hook the big Salmond in Gordon? And can the Tories overrun the Scottish Borders? Everything's up for grabs. 

In 2015, the Scottish National Party won Scotland in a landslide. With the next election expected in 2020, politics for the next five years looked homogenous, managerial and predictable. 

But then came Brexit, talk of a second independence referendum, and an early election. Now everything's at play. Depending on your perspective, this is a proxy indyref2, or a chance to condemn the Brexit government, or the opporunity to turn Scotland blue. One thing is sure - local contests will not just be about collecting the bins on time, but about the great constitutional questions of the day. With a giant splash of egotism. 

Here is my pick of the constituency battles to watch:

1. Who’s the biggest unionist of them all?

Constituency: East Renfrewshire
Battle to watch: Blair McDougall (Labour) vs Paul Masterton (Tory)

If anything symbolised the #Indyreffightback, it was the toppling of Jim Murphy, the Labour MP for East Renfrewshire in 2015. Murphy had slogged away for the No campaign during the 2014 referendum, braving egg throwers and cybernat centurions to make the case for the UK in 100 towns across Scotland. Being ousted by the Scottish National Party’s Kirsten Oswald was the biggest metaphorical egg of them all. 

Still, Murphy only lost by 3,718 votes. The self-styled defenders of the union, the Scottish Tories, have spied an opportunity, and made East Renfrewshire a target seat. Paul Masterton, a local activist, hopes to follow in the footsteps of Jackson Carlaw, who snapped up the same area for the Tories in the Scottish parliamentary elections last year. 

But who’s that appearing on the horizon? Blair McDougall, the former Better Together chief, is waving Labour’s banner. And no one can accuse him of flip flopping on the independence question. 

Since quashing a second independence referendum is the priority for pro-union voters of East Renfrewshire choose, they are likely to vote tactically. So which candidate can persuade them  he’s the winner?

2. The best shade of yellow

Constituency: East Dunbartonshire
Battle: Jo Swinson (Lib Dem) vs John Nicolson (Labour)

When Jo Swinson first won her home constituency in 2005, she was just 25, and by her early thirties, she was pacing the inner sanctums of the Coalition government. But in 2015, East Dunbartonshire voters decided to give her an early retirement and opted for the former broadcaster, the SNP’s John Nicolson, instead by 2,167 votes. 

In England, the Lib Dem surge has been fuelled by an emotional Europeanism. Swinson, though, can sing “Ode to Joy” as many times as she wants – it won’t change the fact that Nicolson is also against Brexit.
So instead, the contest is likely to come down to two factors. One is the characters involved. Nicolson has used his media clout to raise his profile – but has also been accused of “bullying” STV into dropping its political editor Stephen Daisley (Nicolson denies the claims)

The other is the independence referendum. East Dunbartonshire voted 61.2 per cent to stay in the UK in 2014. If voters feel the same way, and vote tactically this time, Nicolson may wish to resurrect his TV career. 

3. Revenge of the Tories

Constituency: Berwickshire, Roxburgh and Selkirk
Battle: John Lamont (Tory) vs Calum Kerr (SNP)

And the winner is… anyone who can reel off this constituency name without twisting their tongue. Let’s call it BRK, or Project Blue. 

BRK, a rural constituency in the Scottish borders, was once a comfortable home for the Liberal Democrat Michael Moore. He was driven out in 2015 by the SNP’s Calum Kerr. Indeed, such was the political turmoil that Moore slumped to third place. Kerr’s biggest rival was the conservative John Lamont. 

Two years later, the electoral horns are sounding, and Lamont is so confident of his victory that he is standing down as an MSP. There were just 328 votes between him and Kerr last time round. So who will be the new ruler of BRK?

4. Labour’s last stand

Constituency: Edinburgh South
Battle: Ian Murray (Labour) vs everyone else

When Ian Murray first won Edinburgh South for Labour in 2010, he might have been in his early thirties, but he was surrounded by Labour heavyweights like Douglas Alexander and Jim Murphy. Five years later, after a catastrophic election night, he was the only Labour MP left in Scotland. 

Murray’s survival is down partly to his seat – a leafy, academic constituency that epitomises Edinburgh’s pro-union, pro-Remain vote – and his no-nonsense opinion on both these issues (he’s no fan of Jeremy Corbyn either). A similarly-minded Labour candidate, Daniel Johnson, won the overlapping Scottish parliamentary constituency in 2016.

Now, though, Murray is fighting a defensive battle on two fronts. The SNP came second in 2015, and will likely field a candidate again. But those with longer memories know that Edinburgh South was once a Tory realm. Stephanie Smith, who is also standing for local elections, will be trying to take a bite out of Murray’s pro-union vote. 

Still, Murray has a good chance of outlasting the siege. As one Labour activist put it: “I think I’ll be spending the next six weeks camping out in Edinburgh South.” 

5. The big fish in the pond

Constituency: Gordon
Battle: Alex Salmond (SNP) vs Colin Clark (Tory)

Freed from the chains of high office, Alex Salmond is increasingly in touch with his inner charismatic bully. When not trying to wind up Anna Soubry, he is talking up a second independence referendum at inconvenient moments and baiting the Brexiteers. This is the big fish the pro-union movement would love to catch. 

But can they do it? Salmond won the seat in 2015 from the Liberal Democrats with a majority of 8,687 votes. Taking on this whopper is Colin Clark, a humble Tory councillor, and he knows what he’s up against.  He called for every unionist to back him, adding: “I have been in training since 2015 and I am fit and ready to win this seat in June.”

To get a sense of how much the Scottish referendum has changed politics, consider the fact that Labour activists are ludicrously excited by this prospect. But however slippery he may be, the SNP goliath in person can win over even devout unionists.  I’m not betting on a hooked Salmond any time soon. 

 

Julia Rampen is the digital news editor of the New Statesman (previously editor of The Staggers, The New Statesman's online rolling politics blog). She has also been deputy editor at Mirror Money Online and has worked as a financial journalist for several trade magazines. 

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