#30. Pensions, oil and finance


Until now, I’ve been hesitant to write about the Scottish independence referendum, though there is no reason whatsoever why the English, the Welsh and the Northern Irish should desist from commenting on a matter that, after all, will affect everyone.

As someone once said, “a country is more an idea than a place”, and I recognise that questions of national identity involve issues which are as much heart as head. Consequently, perusal of statistics cannot alone provide answers, so it is with considerable reluctance that I conclude that going it alone is not an economically attractive option for Scots.

Though I’m not a Scot, I began my working life north of the border, where I found that Scotland is indeed a very different country from England, and in many ways a better one. On grounds not just of history but also of culture and education, the ‘heart’ case for independence is a compelling one. Moreover, I can understand Scots’ aversion to government from Westminster and Whitehall. Indeed, were it on offer I would certainly vote in favour of all four nations securing independence from London!

And yet, and yet. The head, as much as the heart, has to come into the equation, and it is on matters of economics that the case for Scottish independence falls flat on its face.

North Sea oil is a critical part of the equation, yet the heated public debate over this issue has almost entirely missed the point. The focus on remaining recoverable reserves is irrelevant, since whether these reserves are 10 or 20 billion barrels makes very little difference.

What matters is production and, relatedly, the profitability and tax-yielding capability of North Sea oil. Over the ten years from 2003 to 2013, British (for which read “overwhelmingly Scottish”) production of oil declined by 62%, and output fell by almost 9% last year alone. I expect the pace of decline to slacken, but nevertheless to continue, reducing output by a further 30% between now and 2020.

Moreover, the perfectly logical cherry-picking of the past means that remaining oil reserves are becoming increasingly expensive to produce, with some reserves likely to cost as much as US$60/bbl in capital investment alone. If we add in operating expenses, transport costs and the return on up-front capital, it becomes clear that unit profitability is on a severe downwards trend.

The North Sea may continue to produce substantial quantities of oil, then, but its tax-gathering capacity is eroding at annual percentage rates well into double figures.

In short, tax revenue from oil is likely to fall more rapidly than production, probably halving by 2020.

The second issue is Scotland’s income from financial services. The SNP’s glib assumption that an independent Scotland would be invited into the EU as a matter of course ignores the likelihood that Spain, mindful of Catalan ambitions, might veto this precedent. Even if Scotland were admitted, it is likely that she would be compelled to adopt the Euro.

The alternative of piggy-backing on Sterling would be very nearly as bad, since Scotland would be surrendering monetary policy to a foreign country, and would find her room for fiscal manoeuvre very seriously constrained as well.

This combination of monetary considerations suggests that much of Scotland’s financial services industry would “tak’ the low road” to London, stripping Scotland of significant output and revenue just as the North Sea contribution, too, is in sharp decline.

Critical though oil and financial services are, the clincher, for me, has to be public sector pensions.

Unlike private sector provision, which puts money aside to meet future liabilities, the British public sector pension system is a state-sanctioned Ponzi scheme in which the workers of today receive their pensions from the taxpayers of tomorrow. If the government of today were required to put money aside to pay future public sector pensions, the sum required would be of the order of £1,000 billion.

All such Ponzi schemes unravel eventually, and the gap between payments and contributions has already widened alarmingly. This is likely to continue, and the time will certainly come when Britain has to face a painful choice between reducing public sector pensions or hiking general taxation. Unfortunately, this choice is likely to be forced on Scotland much more quickly than it will be imposed on the United Kingdom.

The fiscal cocktail facing an independent Scotland would, or certainly should, daunt the bravest heart. With monetary (and probably fiscal) policy imposed from abroad, with North Sea oil taxes in steep decline and with much of the financial services sector in flight, an independent Scotland might pretty soon find itself unable to meet pension commitments without imposing still more taxation on a shrunken economic base which will already be taxed to the hilt.

As an aside, I do wonder whether public sector workers in Scotland realise the personal risk that a “yes” vote would entail.

More broadly, the choice between “devo max” and full independence looks, perhaps sadly, a pretty straightforward one.

23 thoughts on “#30. Pensions, oil and finance

  1. Tim – Your comments seem to relate to how things are now. Would you have the same view if “everything” were to collapse?

  2. For a rare change I’ll choose to differ with you, Dr Morgan (and like you I’m not a Scot). I accept your logic on pensions and declining oil revenues, but the current scenario is one where Scotland is governed from Westminster much as an awkward province might have been governed from Rome (although the Scots were not a subject people of the Romans). Scotland has a weak economy which has higher dependance on public sector spending than the UK as a whole, higher public sector consumption, and higher public sector employment – take out the declining benefits of oil and there’s not that much left. Even the vaunted financial services capability includes the dubious rumps of HBOS, RBS, and the remnants of the Dunfermline BS, none of which look like real value creators in the their own right. Considering the proud and innovative history of Scotland, its current status (like Wales) as a combined agricultural and public sector theme park is a sad outcome, that denies the possibilities and encourages dependency on Westminster. Despite an education system internationally recognised as excellent, for fully thirty years, Scotland’s economy has grown half a per cent slower than the whole of the UK (and compared to England that figure will be worse). Weekly earnings are lower, unemployment higher, and productivity worse. The “benefits” of the union are rather difficult to see in those numbers, are they not? Whilst acknowledging the problems you highlight and more, how many more decades would you want the people of Scotland to tolerate a Westminster managed relative decline?

    Looking at well run, fully developed countries, size is no issue to success, inside or outside the EU. Sweden, Denmark, Switzerland come to mind here. In the event of the socialists of the SNP taking power in a post independence Scotland, I accept they’d struggle initially with a number of predictable crises, but fairly quickly the SNP would find that tax and spend wouldn’t work, and would be forced to look to enterprise to create a sound economy. In my view, a Scottish government, governing Scotland for the Scots would quickly be forced to create a business friendly economy able to maximise the potential. With a clean sheet of paper, they could build (for example) a modern tax and welfare system, freeing business from counter-productive UK taxes like employers National Insurance. They would be forced to address public sector pensions (as opposed to the Westminster approach to public sector pensions of “shut your eyes and put your fingers in your ears”).

    There’s plenty of problems. But take the EU issue – Scotland doesn’t need to join the EU, it should pursue membership of EFTA, which gains most of the benefits, with few of the downsides. If the EU won’t play ball, then seek to join NAFTA, or sign up to WTO – the bl***y minded intransigence of the status-quo’ers of the EU can be overcome, particularly if Scotland pursues an alternative approach that the EU would prefer even less. The whole idea that the EU would welcome poor Baltic states with populations below that of a single large city, and then exclude Scotland does not bear scrutiny.

    On the currency issue, the face-pulling in Westminster need not stop Scotland operating a 1:1 fixed exchange rates for a Scottish pound. Many countries operate fixed exchange rates that in practice tie their monetary policy to another country. Alternatively they issue their own new floating currency (one would hope the groat). Sweden has no major problems using the Krona. Admittedly there’s costs in having your own floating currency but nothing that can’t be done.

    The question that I see is not “why should Scotland be independent?” but “why should Scotland choose to keep themselves tied to a sclerotic and insolvent regime in Westminster that has kept them in penury for decades?”

    Good luck to the people of Scotland – but at least you lot have a choice to give Westminster the shove. The rest of us aren’t lucky enough to have that choice!

    • Well if I was a Scot I would vote no, if as English I had a vote I would vote yes. Why? we British will be the net winners as we get the baling out of Scotland off our backs. The Scots need to realise that membership of the EU isnt possible for 5 years and therefore the monetary problems will only increase, the Commonwealth may reject their application for membership, and there is no reason for the oil companies not to turn the screw and demand of a weak Scotland a reduction of oil taxation revenues. The UK will move its military south, causing the closure of Faslane;2 Air Bases, 2 Commando units and the RN Base ar Rosyth, this will result in the Armed forces and their families moving south with the loss of income, there is plenty of room for them on existing bases in UK. OK Scotland vote yes PLEASE, and get off our backs. ps I live in France so don’t really care.

  3. I agree totally with Badger. I wonder if our underlying mind-sets influence our views on things like this. Having personal experience of the inefficiencies of top-down management control systems I now strongly believe in bottom-up, decentralised systems. Hence my agreement.

  4. Thanks both, a lot of good points.

    Your last point, Badger, is the killer – Scotland has the “choice to give Westminster the shove”. Earlier this year, UKIP became the first party other than Con or Lab to win a UK national election for 100 years. Notwithstanding the EU, I see “anti-politics” (if you like, “anti-Westminster” or “anti-establishment”) as UKIP’s core appeal, and I think the independence vote is in large part “anti-politics” north of the border.

    My long-standing view is that there is a widening gulf between governing and governed in the UK. More succinctly, our governance is a shambles.

    Our system is democratic in name only, when you combine an FPTP system with central control over constituency nominations. The permanent establishment has power without accountability – no heads have rolled over Stafford (up to 1,200 unnecessary deaths), the collapse of border controls, the £224m bill for the borders IT fiasco, the rail bidding fiasco or, thus far anyway, the Rotherham disaster. The public has lost faith in Parliament (expenses), the media, the banking system, the police…………….

    So, I can understand Scotland wanting out of a British system described elsewhere as “government by hypocrisy”. That’s why the belated offer of extra powers for Scotland will be regarded as contemptibly cynical. I’d like out myself – for each part of England, as well as for the other three kingdoms. The governing elite has, amongst other things, given us a debt-riddled economy and impending energy shortages.

    We need reform – but is Scotland better off staying in, and making the case for reform – or getting out?

    Scotland has a very big goverrnment sector (about 22% of ex-oil GDP). Financial services are an even bigger proportion (25%), and might leave. Oil production is declining, and profitability (and taxes) are being eroded by rapid cost increases. Scotland’s share of unfunded public sector pension liabilities is at least £100bn. – can they afford it, with North Sea and financial services revenue at risk?

    Or would it be better to stay in, and help take Britain back from the brink?

  5. “Scotland’s share of unfunded public sector pension liabilities is at least £100bn. – can they afford it, with North Sea and financial services revenue at risk?”

    If they can’t, then their future in the union as as an increasingly client province, dependent on Westminster hand outs. But as you have so ably spelled out, going back to your work “Thinking the Unthinkable”, Britain as a whole isn’t in a position to honour its unfunded public sector commitments, so there’s no real financial security for Scotland in the union, is there? An independent Scotland will be forced to confront this issue, or it can remain in the union, and wait until Westminster is forced to do so.

    On financial services, is it feasible that much of the industry would up sticks and leave? I think not. At the transactional level there’s no real reason to incur costs to close a Kircaldy call centre serving UK-wide customers and open a new one on Tyneside. Different local rules have not stopped the City of London from being successful in financial services offered to other nations, nor stopped (eg) Dublin building up a nice niche in property related financial services (yes, I know what happened next, but that has limited bearing on demonstrating that not all financial activity has to take place in the City).

    By staying in, would Scotland help take Britain back from the financial brink? I’d say not. By staying in, the Westminster status quo has won the day. Scotland remains a province wholly governed from London some 300 miles away. Ignoring UKIP’s prospects, Scotland staying in preserves the balance of power at Westminster, where the “buggins turn” between Labour and Conservatives is a major contributor to the unrepresentative and incompetent governance that we are subject to. Look at the uninspiring names that are campaigning for the union: Brown, Darling, Cameron, Cable. Half of the “no” campaign are intimately associated with the parlous economic mismanagement of the last Labour government – will all of that suddenly change by virtue of the continuing presence of a few safe-seat Labour MPs from the west end of Glasgow?

    My view is that if Westminster won’t face up to the challenges that face the union (and they clearly won’t), then Scotland has to be better off in a situation where it is forced to do so. As with Ireland post-crash, the medicine is not going to taste nice, but the patient isn’t going to get better on debt flavoured placebos.

  6. Perhaps the first years will not be rosy but for sure it does make sense to start from scratch than maintain current system.
    Not anything, a YES vote will help the political environment south of the border by putting pressure on 3 london parties to change.
    Even in Scotland a YES vote, will mean that the london-led parties will have to change their alliances and merge/disappear.

    Regarding the pensions, I see no reason why this should be an issue for Scotland when it is already an issue for the UK.
    As for the financial institutions, we know that they have no faith. Who knows if in 4-5 years if rUK leaves EU, then they might pack their bags and move north again?

    All in all, YES might deliver more change to the rUK than for the Scottish themselves. And we probably need change because the current ponzi schemes should not continue anymore..

  7. Thanks all, great points. As I’m sure you all know, I believe that the UK has serious economic problems – which borrowing masquerading as growth doesn’t disguise – and the system of government is dysfunctional. I comment a lot on the current account deficit – taking interest and dividend flows into account as well as net trade, the UK is in the hole to the tune of £70bn annually, a gap filled partly by new debt and partly by asset sales.

    It’s unsustainable, which tells me that it will change. What (ignoring Scotland just for now) is going to be the catalyst? I don’t think it’s UKIP as our system is designed to keep out new parties. So I think it’s the markets. Again ignoring Scotland for the mo, our current account balance isn’t going to improve, with the Eurozone (a major trading partner) moribund and our energy production declining. I expect sterling to come under severe pressure, threatening to drive rates up – potentially disastrous for a country with such enormous debts. At the same time, I’m expecting an energy supply squeeze, for reasons we all know about – if the lights don’t go out this winter, as I’ve long predicted, then it will be next winter.

    If Scotland leaves, of course, the rUK current account will broaden, from £70bn to at least £100bn, roughly 7% of GDP then coming courtesy of trade creditors. We’re loaded with too much debt already, and there’s a limit to asset sales. In short, the current account imbalance of rUK could crash Sterling, something that I think is already being hinted at by the market.

    But how does Scotland fare if – using the pound, ex-UK, ex-EU at least for now – there’s a Sterling crash? A Sterling crash would feed straight through to banking stability – again, with RBS and Lloyds/HBOS (at least for now), that affects Scotland.

    Now I accept that, if the public sector pensions ponzi is bad for Scotland, it’s bad for rUK too. One day it will unravel. But Scotland has a bigger, meaning a quicker-to-crystalise, problem than rUK. Proportionately, the Scottish public sector is a lot bigger.

    One case might be that Scotland exits, rUK is brought low by the current account and Scotland eventually weathers the storm – but how much pain is that going to cause?

    Bottom line is we need fundamental reform – is that likelier with Scotland in, agitating for change? Or with Scotland out and the rUK in very deep trouble?

    • Tim,

      An energy supply squeeze is looking increasingly likely this winter, now that Hartlepool and Heysham plants are likely to be closed until the new year, and with a fair whack of coal generation out due to some fires. However, barring a convergence of bad events (cold, still winter, more plant outages and maybe Russia playing hardball with gas supplies) I expect it’s likely that we’ll squeeze through by browning out heavy industry at peak times, though blackouts are a distinct possibility. The real crunch is going to come after 2016, when the IED comes into effect and most of the noncompliant coal plants will presumably burn through their allocated hours very quickly, in order to avoid maintenance costs. Then we’ll be left with a load of wind that needs balancing, a load of gas plant operators who won’t want to sun their turbines at low efficiency and a increasingly creaky nuclear fleet which will start to be decomissioned by the end of the decade. Olduvai here we come!

    • Exactly so, and something I’ve been warning about for many years.

      Since 2003, UK production of primary energy has declined from 237 mmtoe to 105 mmtoe. New nukes should have been ordered by 2000 at the very latest but the then govt dropped the ball. Coal has been run down too quickly, and load factors on wind and solar are too low. Together, solar and wind met only 3.3% of our primary energy requirement last year.

      We were net energy exporters in 2003. We imported 45% of our needs last year, and that’ll be nearer 60% by 2020. No wonder our current account deficit is so lethally high!

      This is an indictment of energy policy over more than a decade. The powers that be won’t wake up until the lights actually go off, and shale gives them the perfect exuse.

      Still, look on the bright side – if we can scrape through the coming winter, there won’t be a problem until after the next election!

  8. Tim,

    I have a Public Sector Pension (Funded) and my State Pension (I’m 52 so not getting them yet!)

    Now when (if?) I do get the funded pension my sons are going to have to pay for it through Company Profits, rents etc etc, on the other hand my State Pension will be paid for by taxes – in effect a levy on the activities that fund the funded pension.

    I didn’t have the Public Sector Pension then I would be getting various means tested benefits all of which would cost.

    And of course as I will hopefully have a modest post retirement income I will be able to be ‘economically active ‘ and keep the economy ticking over

    Both are in effect charges on future generations & I fail to see the difference between a tax funded and a privately funded scheme from that point of view

    • Well, the difference is that a private sector scheme is “funded”, meaning that your own contributions are invested, and the invested sum is then used to pay your pension when you retire. In some other countries, public sector schemes are funded. With the UK system, contributions simply go into the tax pool and pensions are paid out of general taxation.

      The gap between contributions and payments is the problem. In 2009-10, the gap was £3.7bn (contributions of £20.7bn, payments of £24.4bn). In 2013-14 the gap was £9.2bn. The Treasury expects the gap to be £9.6bn this year and £11bn in 2014-15. Over six years, payments will have risen by £10.8bn whereas contributions will have increased by only £3.5bn.

      This widening gap means that, at some point, government must either:

      – increase contributions
      – reduce payments; or
      – accept an escalating cost out of general taxation

      This therefore becomes a huge problem for the UK, probably within five years. But it’s an even bigger and nearer-term problem for Scotland, where the state sector is bigger.

  9. Tim

    I think there’s a tendency in this situation for so many of us not to see ‘the big screen scene’. When it became clear to our politicians (that’s the politicians of the Tory Party, the Labour Party, the Liberals and the Scottish Nationalists) that the pressure for an independence referendum in Scotland was overwhelming they should have done this. They should have said, right a vote for Scottish independence would be a de facto vote to dismantle the United Kingdom; that much is incontrovertible. At that point the politicians should have had the guts to realise that there needed to be not a referendum for the Scots alone (barmy and one-sided when you think about it), but a referendum for the British on the future of the Union. Personally, I would have welcomed such a referendum; all of us – the English, the Welsh, the people of Northern Ireland and the Scots – would have had the opportunity to vote on either the retention of the Union, or its dismantlement. Right now, we face the prospect of a tiny minority of the UK electorate fomenting the most seismic and spectacular constitutional, economic and political earthquake in centuries within these islands. The reason for this astonishing situation is nothing to do with Scottish nationalist fervour, as such, and everything to do with blistering political cowardice and incompetence. Wee ‘Eck saw his opportunity and took it; any other politician would have done the same; that’s what politicos are like – opportunists. However, history and even the most rudimentary constitutional and economic analysis suggest that if the vote goes ‘Yes’ next week, the United Kingdom will be plunged into a huge and distracting crisis. As ever, it will be the poorest and the weakest in our respective nations of the Union that will suffer most. Good luck to the Scottish Nationalists if they achieve independence for Scotland. But thereafter, expect the English, the Welsh and the Irish to demand independence too – and standby for years, if not decades of societal disruption.

    Regards as ever


    • Thanks M – great comments as ever.

      I think we agree wholeheartedly about the shambolic system of government in the UK, so I can see why Scots might want out of it. Even I’ve been taken aback by the establishment’s currying of favour in recent days. Flying the saltire over Downing Street – or should that be Clowning Street? – was astonishingly patronising.

      Those of us with long enough memories can recall the formation of the Lib Dems, when David O and David S, sitting behind a yellow table in front of a yellow backdrop, were likened to two flowerpot men sitting in a bucket of custard – I’m reminded of that by seeing DC, EM and NC flying separately to Scotland like latter-day Dukes of Cumberland trying to steam the tartan horde. Hilarious, if it wasn’t so serious….

  10. Dr Tim said:

    “I’d like out myself – for each part of England, as well as for the other three kingdoms.”

    Curiously, the United Kingdom includes only two kingdoms: England and Scotland. Wales is a principality, and Northern Ireland is best described as a constituent country. Some call NI a province, or simply Ulster, but the province of Ulster extends beyond Northern Ireland and includes three counties in the Republic. See also my coin forum topic, “The Strange Story of the Northern Irish Two Pence”:


    “Each part of England” – how would you divide them up? Would Scilly and the Isle of Wight each become sovereign?

    I’ll be happy with whatever decision Scotland makes. I’m just sad that they now appear to be split down the middle. Whatever happens, the cat is truly among the pigeons now.

    • Aside from Scotland and Wales, Britain is surely the most centralised nation in Europe. The people of North East England voted no (by 78:22) to a regional assembly, presumably because they guessed it would either (a) be a Westminster-nominated quango, or (b) would have no powers at all.

      The cat is indeed among the pigeons now, and one of my next projects will be to look at how modernity and democracy might be introduced into whatever size of UK or rUK exists after the Scots have voted.

    • “The people of North East England voted no (by 78:22) to a regional assembly, presumably because they guessed it would either (a) be a Westminster-nominated quango, or (b) would have no powers at all.”

      And politicians are so distrusted now, that people didn’t want more of them. Another reason is the expense of another layer of bureaucracy. Furthermore, the English are mostly conservative (with a small “c”) by default. Why change? I also heard a Sunderland man at the time, expressing his fear that Sunderland would be dominated by bigger Newcastle in such an assembly. Well, I grew up in Newcastle but have lived in London for 30 years. Traditionally, the areas north and south of the Tyne were administered separately, until 1974, when Ted Heath rearranged the counties. My father was disgusted that Newcastle was then lumped in with local rival Sunderland, in the county of “Tyne and Wear”. This had never been the case. It was similar to, say, putting Manchester and Merseyside together in a single unit. Apparently the EU had required this referendum, because it felt the UK had too little local democracy (true!) and advised the geographical unit in question. The lesson is that politicians should consult the people first, and respect local traditions, so that they can offer a realistic option that people will respond to.

      Getting in touch with the people works wonders. I was amazed that my sister, who had never been interested in politics, was hugely interested in the 2010 general election debates between the party leaders. She also watched with fascination as the coalition government was formed. Now she is back to apathy. Is it surprising? Look at PMQs: “Would the Prime Minister agree with me that this government is the best in the entire known multiverse?” Cameron: “Yes, I would certainly agree with the Rt Hon member…”. Miliband: “The Prime Minister just doesn’t GEDDIT – does he?!” Childish in the extreme. No wonder people are turned off.

      Semas Milne of the Guardian (admittedly a self-confessed Marxist) offers a scary but thought-provoking dystopia of a broken Union. England becomes Tory in perpetuity, and Scotland is forced to engage in a race to the bottom, to see who can offer the lowest corporation tax. Result: the multinationals gain even more wealth and power:


  11. Maybe it is too soon to be having this kind of discussion? Whatever happens will be ill-informed because the underlying assumption of the electorate and the decision-makers will be that, in due course, “business as usual” will resume.

  12. The real problem lies with the fact that the political scene is unable to take a long-term look at the issues mentioned above.
    They have such a short-term view and they are not preparing the country for what is ahead of us.

    This is by far the biggest problem. It is like a big corporation who had some successes in the past and it keeps going with the same pace/methods but the environment around it is changing very fast.

    Thats why YES might be good not only for Scotland but for rUK as well. We need more maturity from the parties but they seem to be captured by the status quo and are unable to implement any long-term strategic decisions.

    • Thanks SK. I agree with a lot of this, but could you comment on just one problem for me? Basically, if Scotland leaves, rUK’s current account deficit will soar to over 7% of GDP – and even today’s 5.5% isn’t viable.

      You see, aside from my former colleague Robert Peston, no one seems to have spotted that, post referendum, rUK could be relying for 7% of its GDP on creditor forbearance, asset sales and yet more borrowing.

    • I cant see any change with a NO vote. The same 3 inept “leaders” will be at the next elections with the same short-termism.
      At least a YES means that both parties will have to come terms with reality and see if they can respond.

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