It was 21 years after Norway struck oil in the North Sea that Oslo passed legislation to establish a sovereign wealth fund. The principle was to “give the government room for manoeuvring in fiscal policy should the economy contract and manage the financial challenges of an ageing population”. Six years later, in 1996, the fund received its first transfer of Nkr46 billion. Today, Pension Fund Global has Nkr7.3 trillion of assets (£710 billion), twice the size of the country’s economy.
Britain’s first North Sea discovery came four years before Norway’s, when BP hit the West Sole field in 1965. It was the start of a fiscal plundering of the basin. During the next five decades, Britain’s reserves were run down and every penny of tax revenue spent. Today, the UK has nothing to show for its windfall. State guarantees to cover decommissioning costs are expected to wipe out dwindling tax receipts. All that remains are the same challenges for which Norway is now prepared.
It may seem bloody-minded to consider building a UK sovereign wealth fund just as the oil runs out and with the country still teetering under austerity, but the Institute for Fiscal Studies will provide a reminder today of the sorry dereliction of duty in the past and why there is no time to waste. Its annual UK health check will highlight the real state of the nation’s public finances.
According to official measures, public debt in 2014-15 was £1.55 trillion and the deficit, excluding investment, £57 billion. Yet, as the IFS will show, on a measure comparable to company accounting, the net debt would have been £2.1 trillion and the deficit £152 billion.
What the official numbers don’t reveal is the cost of public sector pensions, private finance initiatives and other obligations in our pay-as-you-go system. Pensions are the big one, with a public sector liability of £1.49 trillion. Add the state pension and the estimates of long-term debt are as high as £6 trillion.
No sovereign wealth fund could cover the full liability, but dumping it all on the next generation is cruelly irresponsible. What makes it unfair is that the workforce is shrinking as a share of the total population, loading expanding pension costs on to a contracting group of youngsters, now without the bulwark of migration post-Brexit.
Squirrelling money away today is not an option, but John Penrose, the former Tory cabinet office minister, has an intriguing idea. He wants the government to draw up principles that ensure tax revenues are set aside tomorrow. To create a sovereign wealth fund, parliament should introduce a “national debt charge” as a share of GDP, like the aid and defence budgets.
So that it does not hit immediately, Mr Penrose reckons the charge should start at 2.1 per cent, the present interest bill on UK debt. Under the government’s fiscal rules, the bill ought to decline and, as a gap between that and the 2.1 per cent charge opens, the difference should be set aside. At 2.1 per cent, the fund would not receive its first pennies until 2020.
Creating a sovereign wealth fund this way could take 90 years at such an incremental pace that spending on public services need not suffer. New resource windfalls, such as from fracking, could be channelled into the fund and an institutional framework that mimics Norway established, with investment in infrastructure an added bonus. Chile started down a similar path in 2006 and expects the job to take 70 years.
Fifty years from now, Britain will need to find an extra £156 billion annually to pay for the ageing population, according to the Office for Budget Responsibility. The bill can be left for a generation yet to be born or part-paid in tiny instalments starting today. We were reckless once, there’s no need to be reckless again.
This article appeared in The Times and was written by Philip Aldrick, Economics Editor.