Without North Sea oil and gas it is unlikely that there would even be a referendum on Scottish independence. Its discovery is the first chapter in the foundation story for nationalists who believe that Margaret Thatcher was in effect Daniel Day Lewis in There Will Be Blood. But oil is about more than the past; it is critical to the Yes campaign’s arguments about the present and the future, too. It anchors the (somewhat spurious) argument that Scotland would be richer than the rest of the UK, and allows Alex Salmond to promise the creation of a sovereign wealth fund.

Scots’ perceptions of the economic consequences of independence will be vital to the outcome of the vote on September 18. But unfortunately for Scots there is a big discrepancy between the forecasts of direct tax revenues from the North Sea made by the Scottish government and those made by the Office for Budget Responsibility, the UK’s fiscal watchdog. In this post I want to try to explain why these forecasts differ and why I believe the Scottish government’s optimism is misleading.

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The approach taken by the UK government to estimate the effects of the carbon budgets on economic growth uses the HMRC CGE (“computable general equilibrium”) model. (See the 2011 carbon plan, p.181). This model has proved controversial for its use in assessing tax cuts but its use in climate change policy also warrants scrutiny.

Here is how it works:

First, calculate how the economy would work under a few simplifying assumptions.

Suppose there is never any unemployment or idle capacity.

Suppose there is no risk or uncertainty about the future.

Imagine there is no financial system or monetary policy. Read more

Dynamic modelling sounds like something Cara Delivinge might do as she scatters hashtags across Instagram. But it is actually even more subversive and exciting than our Cara. If the advocates of this mathematical economic modelling technique get their way, then it could transform how public policy is assessed in Britain. In doing so, it could make arguing for tax cuts and a smaller state a lot easier.

Let’s look back to the Autumn Statement. In its response to the chancellor’s annual announcements, The Taxpayers’ Alliance highlighted three areas where it says there are “weaknesses in tax policy”. Predictably, one weakness is that taxes are too high. Another is that there are too many of them. But the third recommendation is more esoteric. The pressure group said that “dynamic modelling” should be used for “all fiscal policy changes announced by the government”.

What is so important about this?

One clue comes in the form of a paper released on Monday by the Treasury and HM Revenue & Customs into the coalition’s policies on fuel duty, the tax on refined petrol, diesel and other fuels.  Read more

In the film There Will Be Blood, Daniel Plainview, a monomaniacal oilman played by Daniel Day-Lewis, tries to lowball the Sunday family, whose hydrocarbon-rich land he covets, by claiming that he wants their acreage for quail-hunting. But Eli Sunday knows Plainview’s real intentions. He asks for $5,000, ostensibly to invest in his evangelical church. Many years later, Eli, who never received the money from Plainview, tracks the multi-millionaire oilman down in his Xanadu. Eli complains of past grievances and brings a quixotic plan for future exploration of the Sunday land.

I won’t spoil the ending but there is something – an admittedly tenuous something – of the Eli Sunday in the Scottish National party’s arguments about North Sea oil and gas. Alex Salmond’s party is right to be critical of how opportunities were wasted but it is too sanguine about what oil and gas would offer an independent Scotland. Read more

Of course, the most important chart for this particular episode is not one showing Defra spending but the one showing average rainfall. Nevertheless, I find the story of flood defences indicative of the coalition government’s approach to public spending.

Here, as in other areas, it seeks to make up central government shortfalls with local or private spending. This might be a perfectly sensible or unfortunately necessary idea but it is disingenuous to present it as increased government spending. Flood defence spending also looks like a good case of a missed chance for public investment. Read more

The UK energy secretary has written to the energy market regulator and the nascent Competition and Markets Authority – two of the three institutions reviewing competition in the energy market, an area of intense public and political interest – suggesting that Centrica is making too much money in its domestic gas supply business. Read more

Grangemouth is stuck in the middle. About half way between Edinburgh and Glasgow, the town is nestled in the centre of Scotland. But it is caught in time as well as place. Over the past century, Scotland’s economy has pivoted from manufacturing in the west to finance and oil in the east. Grangemouth, a manufacturer of oil products, has helped the Falkrik area to bridge this historical divide. A vast labyrinth of pipes 4,000km long atop an area the size of 640 football pitches, it makes for some bulwark. Read more

At what should have been called Prime Minister John Major’s Questions, David Cameron announced that the UK government will review the “green charges” found in energy bills.

Although it is vital to separate the political signal from the noise, Ed Miliband’s energy bills pledge has created a cacophony. Mr Cameron’s review is his clearest response to date but it is important to understand the role played by green charges in this matter. Read more

Prime Minister’s questions are often more fruitful when they are asked of an incumbent’s predecessors. This afternoon, Sir John Major called for a windfall tax on Britain’s energy companies. A Downing Street spokesperson says it is an “interesting contribution” from the former Conservative PM, who is not one to speak rashly, but that there are “no plans” to introduce such a levy. Hmmmm …. Read more

Has the UK government struck the right strike price in its nuclear deal?

Provisionally set today – a decade before generation is expected to begin – at approximately twice the current wholesale price of electricity over 35 years, this is perhaps the biggest single hedge this government will make. Read more

Whenever there is a discussion about problems in the energy market, it tends to concentrate on one or two aspects. This, along with a lack of transparency, prevents a comprehensive understanding of the market’s flaws, contributing to mistrust. Price freezes are a crude instrument but their popularity shows the depth of the public’s anger. Yet, as Mr Miliband well knows, intervention like this must be followed by genuine reform. This must tackle the real Big Six problems in the market. Read more

Ed Miliband is not the only political leader to recognise the importance of rising energy bills. But in promising a price freeze he now “owns” the issue. The move tells us a lot about the Labour leader – including how he would govern if he became prime minister. Read more