Bang!: A History of Britain in the 1980s (39 page)

What should have been done with the oil revenue? The prime minister’s ex-Cabinet colleague, Sir Ian Gilmour, lamented that ‘North Sea oil could have been used to finance a massive
increase of investment in industry and in the infrastructure’, leaving ‘industry restructured and made more competitive’.
⁴¹
It was
a view that ran wholly counter to Thatcher’s notion that what British industry needed to become more competitive was fuller exposure to market forces, rather than easier access to Treasury
handouts. She interpreted the case for using oil revenue for the ‘restructuring of industry’ as merely an effort to involve the state again in picking winners, a policy
practiced without conspicuous success by Harold Wilson’s government. Thatcher probably doubted her own ministers would be adept pickers of which companies and projects to back;
she was certainly not keen that a fund might still be fructifying for a future Labour administration to spend as it pleased, perhaps propping up dying blue-collar industries at the behest of the
trade union movement. Put bluntly, she did not want the revenue raised from oil wells redirected back down coal mines. Entrepreneurs should look to banks and the stock market – nothing she
had seen in the workings of government convinced her that civil servants were better than capitalists at indentifying where there was a return to be made from an investment. Consequently, Thatcher
continued the policy of the Callaghan government which, during a Cabinet meeting in February 1978, had determined that the oil revenue should instead go into general Treasury funds, thereby leaving
the Chancellor free to decide the disbursement between current public spending, investment, debt repayment and tax cuts.

The failure to answer the question of what the country would do once the oil eventually ran out raises the proposition that it would have been better to ensure that that day was postponed for as
long as possible. Drawing out the life of the oilfields would have meant Whitehall enacting a ‘depletion policy’ by intervening to slow down the rate of extraction. Such a policy was
pursued by the other major North Sea oil nation, Norway, through its state-owned company Statoil. Curtailing rather than permitting an unbridled production boom between 1979 and 1982 would have
removed some of the upwards pressure on sterling, making it less of a petro-currency at exactly the moment that the high exchange rate was pricing British industry out of export markets. However,
the Treasury’s hands were tied during the crucial period of sterling’s appreciation because of a binding commitment the Labour government had made in 1974 to the oil companies promising
not to enforce major extraction restrictions until 1982 – the date, as it transpired, by which the worst of the recession had passed. Although Nigel Lawson then extended the guarantee until
1985, after that point there was no need for a Whitehall diktat to enforce reduced extraction rates because the market, in the shape of the oil price crash, had achieved the same end. Indeed, the
low price for oil in the years after 1985 suggested that, far from squandering future revenue, the Treasury had maximized petroleum revenue tax at exactly the right moment. This was a happy
accident – though one brought about only because the government refused to bow to the contemporary wisdom that delaying the rate of extraction made sense because oil could only continue to
appreciate in value, especially as it became scarcer worldwide. It was not until the first decade of the twenty-first century that the oil price really appreciated again, by which time government
policy was switching to the promotion of greener, non-carbon energy sources. Thus, it is
possible that British ‘short-termist’ attitudes in the early eighties
actually allowed the most value to be extracted from the asset.

Nevertheless, should that value have been invested for the future rather than spent at the time? Norway’s experience offered an example of how North Sea oil might have been carefully
managed and its revenue directed to long-term aims. In truth, the Norwegian approach was as much a product of common sense as of Scandinavian socialist planning. After all, the destabilizing effect
of North Sea oil production on a diverse and sizeable economy of fifty-six million Britons was as nothing to the distortion that unrestricted production would have brought to a nation of four
million Norwegians. For Oslo, the
laissez-faire
approach was never a viable option: either the oil stock was carefully managed or it would grotesquely and detrimentally unbalance the
national economy. Nevertheless, proportionate to the size of the economy, Norway’s oil production during the eighties was vastly greater than that of the UK – by 1990, it was even
outstripping the UK’s production in absolute as well as relative terms.
⁴²
Investment in the country’s infrastructure greatly increased
the number of Norwegians on the public sector payroll but did not boost the numbers engaged in the industrial sector. Despite considerable investment from oil proceeds, the proportion of Norwegians
employed by industry shrank significantly below that of the UK, to 17 per cent of the workforce by 1990. To confuse matters for comparative purposes, Norway’s government was Conservative
between 1981 and 1986 and combined a managed depletion policy and economic investment with the tax cuts and financial deregulation favoured in Britain. When the oil price collapse brought
Norway’s Conservative experiment to a halt in 1986 – with the country’s budget deficit still running at 15 per cent – the incoming Labour administration partly reversed the
country’s market-liberalizing policies.
⁴³

The essential difference was that both Norway’s left-and right-wing governments established a legacy from oil that the Thatcher years failed to bequeath. Norway used part of its North Sea
oil revenue to create what by 2008 had reached a 2 trillion kroner (£200 billion) national pension fund. If Britain had likewise invested in government bonds over the same timescale, it could
have multiplied to around £450 billion (equivalent to Britain’s total tax revenues for 2007/8), which could have been used, as in Norway, to help pay for the long-term burden of an
ageing population.
⁴⁴
Whereas oil-producing nations such as Saudi Arabia, the constituent states of the United Arab Emirates, and Kuwait channelled
their oil proceeds into sovereign wealth funds, which became huge investment organizations taking major shares in prize foreign assets (including British ones), the UK instead chose the short-term
option, addressing the immediate need to reduce taxation (and to pay for a vastly larger section of society on unemployment benefit) while seeking also to balance the budget.

But even short-term fixes have longer-term consequences. The extent to which lower taxes generated enterprise and stimulated growth, while impossible to measure
accurately, cannot be discounted as a factor in the country’s above-average economic performance when measured against European competitors over the succeeding thirty years (having suffered a
growth rate below the European average over the preceding thirty years). Without the oil revenue, tax levels on both producers and consumers would inevitably have been higher, or else the Thatcher
government would have been forced to introduce far more stringent spending cuts. In 1979, even basic rate taxpayers surrendered 33 per cent of their earnings to income tax. By 1990, they were
losing only one quarter rather than one third of their wages to income tax, while higher earners had seen a transformative fall in the tax on their incomes from 83 per cent to 40 per cent. Burdens
were also removed from business, with corporation tax slashed from 52 to 34 per cent. Lower taxes gave Britons, whether as employers or employees, more money to save or spend as they chose. Much of
this ended up fuelling the property market, creating a distortion of its own and channelling savings into one of the less productive sectors of the economy. But the property market was not the only
destination for this new wealth. While the Thatcher government left no Norwegian-style pension fund or Kuwaiti sovereign wealth investment arm as a legacy from the oil bounty, it could claim to
have used it towards creating the conditions in which private pension funds were able to generate vast sums for those in search of a comfortable retirement. Indeed, the contribution of British oil
companies to the stock market was extensive, ensuring that in the twenty years following the eighties pension funds relied heavily on BP as one of their core equity holdings. Of the £70
billion the top 100 FTSE companies paid out in dividends in 2009, £10 billion came from BP.
⁴⁵
It was private earnings from the North Sea that
helped create one of the undoubted turnarounds of the eighties – the burgeoning stock of the UK’s net overseas assets, which by 1986 had reached almost £110 billion (up from
£12 billion in 1979), giving the British economy a portfolio of foreign assets on a scale it had not enjoyed since the sell-offs necessitated for national survival in the Second World War. By
the late eighties, only Japan had a higher level of overseas assets.

Britain’s national finances in 1979 were sufficiently precarious for both the outgoing Labour and incoming Conservative governments to conclude that oil proceeds were a necessary lifeline
for the present, rather than the future. What was not foreseen was the extent to which a serious recession would send revenue from other sources of taxation plummeting, using up far more of the oil
revenue – necessarily, but unproductively – in providing welfare benefits. From this point on, analysis becomes overwhelmed by conflicting counter-factual propositions. Charges that the
economic crisis was
one of Thatcherism’s own making typically hypothesize that the call on the public purse would ultimately have been less if the government had tried
to stimulate economic growth rather than hike up interest rates to clamp down on inflation. Stimulating demand and printing money were arguably viable when the Brown and Cameron governments tried
it during the recession of 2008–12 because, at least at the start of the process, there was minimal existing inflation to worry about. Indeed, the fear was that without quantitative easing
there would have been deflation. But Britain in 1980 was already struggling with a 20 per cent inflation rate. Pump-priming an economy at such a moment risked a Latin American-style inflationary
explosion, making money worthless, wiping out savings and precipitating economic collapse – which would ultimately also have lengthened the unemployment queues. Even if the government had
somehow managed to keep a lid on inflation while borrowing vastly more money to keep the economy buoyant, the proposition that Thatcher should have been more prudent and far-sighted with the oil
revenue is undermined if, in the same breath, the case is made that she should also have borrowed far more money. Given that borrowing is taxation deferred, the return on oil investments would have
been clawed back by the debt interest to be repaid on an increased budget deficit.

Whereas oil revenue could have been ring-fenced to create a £450 billion sovereign wealth fund over the next quarter-century, this would have left a gaping hole in the government finances
in the meantime. Assuming no other changes, the removal of oil revenue from government receipts would have left a public sector net debt equivalent to around 50 per cent of GDP by 1990, instead of
the actual figure of just under 30 per cent. Projecting further onwards, this would have left a public sector net debt which was about 32 per cent higher by 2008 than actually transpired –
the equivalent of a £450 billion shortfall which would have needed plugging by additional borrowing.
⁴⁶
Thus the potential long-term gains and
losses that had to be considered in assessing whether to use the oil revenue to meet immediate needs or to create a long-term investment fund were more closely aligned than might at first be
imagined. The reality of the United Kingdom’s failure to make the most of its good fortune in the North Sea was that it could only invest it wisely for the future by risking ruin in the
meantime.

Protest and Survive

In the autumn of 1983, the world came uncomfortably close to annihilation. From the Kremlin there were unmistakably jumpy spasms triggered by fears that efforts to probe Soviet
early warning systems prefigured an American nuclear first strike. ‘Reagan is unpredictable,’ judged Yuri Andropov, who combined the leadership of the world’s other superpower
with being bedridden with terminal kidney failure. ‘You should expect anything from him.’
¹
With these apprehensions clouding in, on 1
September 1983, Soviet jets shot down a South Korean Boeing 747 civil airliner that had inadvertently strayed into the USSR’s airspace over the Sea of Japan. All 269 passengers were killed
(of whom sixty-two were American and two were British). Particularly disastrously for international relations, one of the dead was a US congressman. After initially denying the incident had
happened, the Soviet government swiftly changed tack, covertly recovered and concealed the flight recorders, publicly denounced the United States for the provocation and refused to apologize for
the deaths. Three weeks later, on 26 September 1983, the Soviets’ early warning system showed up what appeared to be a reckless act of retaliation: the United States had launched five nuclear
missiles that were heading straight towards the Soviet Union.

The correct procedure was to check if other command centres were reporting the same formation and then seek Andropov’s response. Rather than follow procedures, Lieutenant Colonel Stanislav
Petrov, the duty officer at the early warning command centre that had spotted the incoming threat, reasoned to himself that the expected US pre-emptive strike ought to have consisted of far more
than five incoming missiles. He spent what were potentially the few minutes available gambling – correctly, as it turned out – that it was a glitch in the satellite system. Thus he did
not raise the alarm and Andropov’s permission to launch a nuclear response was not sought. It cannot be confidently asserted that Petrov’s caution was all that prevented nuclear
Armageddon. Nevertheless, it was a tense incident with catastrophic potential. For his display of personal initiative, Petrov received neither
reward nor promotion and
instead found himself reassigned. He took early retirement and suffered a nervous breakdown.