A Letter to the First Minister

A Letter to the First Minister

  11 Oct 2016

We are delighted to welcome Professor Donald Mackay as a contributor among the distinguished economists who write for WN and explain why Scots should vote Yes on September 18.

This letter is from Professor Sir Donald Mackay, a leading expert on North Sea oil and gas ever since they came onstream in the 1970s.  He was chairman of Scottish Enterprise and an economic adviser to the Secretary of State for Scotland, including the lasfour Conservatives to hold that post, George Younger, Malcolm Rifkind, Michael Forsyth and Ian Lang.  At that time he was a critic of plans to set up a Scottish Parliament, but now he intends to vote Yes in the referendum on September 18.

In this letter, Sir Donald critically examines the various projections for the production and price of oil in the period ahead.  He finds that the figures most used by the British government lie at the extreme lower end of the possible range, whereas the most likely outcomes are those higher up the scale, near to the level estimated by the Scottish government or, on certain assumptions, even above them.  In this case, there would be no danger from the North Sea to the public finances of an independent Scotland.

Dear First Minister

From 1974 I have been arguing that the development of the North Sea province would create substantial direct employment and income in Scotland.  In fact these impacts have been even greater than I anticipated.

The litmus test of public policy is that before these oil and gas reserves are exhausted, some part of the North Sea tax revenues should be used to restructure the supply side of the Scottish economy – particularly industrial, manufacturing and tradable services. This has not happened, but before we rush off to blame Mrs Thatcher again we should recognise that this problem was evident long before her time and that the record of the last Labour administrations was at least as bad, in arguably more favourable circumstances (see the Financial Times, December 24, 2013).

The macroeconomic framework

I begin with the macroeconomic framework which an independent Scottish Government would face and suggest that its fiscal position from 2016 would be very much strengthened by the likely future path of North Sea output and tax revenues. Scotland has operated within a monetary union since 1844, with the Bank of England as the central bank.  Most economists would recognise that the UK is an optimal currency area.   As Anton Muscatelli observed (Financial Times, April 2, 2014), a single currency would benefit both the UK and Scotland: `The most damaging prospect to the rest of the UK from rejecting a sterling currency union is what it would do to its own trade and business activity.’

Fiscal policy within a monetary union would have to be based on symmetric rules for budget deficit and debt sustainability.  Under a Conservative administration in Westminster after 2015 this would require a sustained period of prudence until the UK national debt level had achieved a sustainable level. The Treasury’s basic premise, that an independent Scotland in 2016 would inherit a chronically weak fiscal position, is unsustainable.  It would be easier for Scotland to live within the fiscal rules, because the likely future direct and indirect impacts of North Sea oil and gas would be much greater than the Treasury suggests.

The forecasts differ

First, the arithmetic. The  table below shows the estimated “geographical share” (90 per cent) of North Sea tax receipts which would accrue to a Scottish government.  There are six forecasts based on differing assumptions of output (o) and prices per barrel( p). The $110 is the price per barrel used by the Scottish government in all its recent estimates.  The other data are taken from the Office of Budget Responsibility, Oil & Gas UK and the Department of Energy and Climate Change.