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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Ukrainians now have more freedom of travel - but less freedom of thought

Ukraine's government is rightly concerned about Russian cyber aggression. But does that merit online censorship?

Ukrainians have sacrificed so much in their bid to be recognised as fellow Europeans. Their struggle to extricate themselves from Russian domination is written in the blood of the Euromaidan protestors and the toll of its military dead.

The slow progress of Ukraine’s emergence, into something resembling normality, passed another milestone on 17 May, when President Petro Poroshenko signed an agreement with the EU allowing for visa-free travel in 34 European countries. 

From Sunday 11 June Ukrainians with biometric passports will be able to travel in Europe and stay for 90 days within a 180 period. There are obvious economic benefits to the new agreement. Ukrainians will be free to travel and conduct business with much more efficacy. The new agreement will also reduce the insularity of Ukrainians, many of whom yearn for the cosmopolitanism they see in Western Europe. President Poroshenko was mindful of the symbolism of the agreement. He declared: "Ukraine is returning to the European family. Ukraine says a final farewell to the Soviet and Russian empire."

Perched on the periphery, Ukraine is now set to become more woven into the European mainstream. Ukrainians sense that the western door is slowly but inexorably opening, and that both recognition, and validation beckons. In this respect, it seems that there is much to celebrate.

However, as ever, Ukraine hangs uneasily in the balance between the old ways and the new. On 16 May, Poroshenko signed a decree blocking access to Russian social media websites Yandex, VKontakte and Odnoklassniki. Millions of Ukrainians sign in to these websites every day. Even Poroshenko himself uses them. Five Russian TV stations are already banned in Ukraine. Poroshenko says that "Ukrainians can live without Russian networks". And it is certainly a fact that Ukrainians have responded to the decree by turning away from the Russian platforms in great numbers. Ukrainian Facebook is growing by some 35 percent a day.

In the context of Ukraine’s continuing conflict with Russia, it is perhaps understandable that the government in Kiev wishes to limit Russian trolls, together with Russian state influence and misinformation. This is certainly also the case across the whole western world, which is keenly aware of Russian cyber aggression. Nevertheless, one must ask why countries such as Britain, France and Germany continue to allow their citizens to access Russian media platforms, when Ukraine does not. 

While the new travel freedoms for Ukrainians has unleashed optimism, the latest decree has indicated something a little darker about the future. President Poroshenko would do well to consider the actions of other European governments that he so ardently wishes to emulate. Closing down social networks is usually done by authoritarian regimes like North Korea, China and Saudi Arabia. But Poroshenko advocates democracy, and in democracy there is no place for such acts. It is surely a mark of a nation’s maturity to encourage freedom of thought, as well travel.

Mohammad Zahoor is the publisher of Ukrainian newspaper The Kyiv Post.

 

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