When Margaret Thatcher's governments began "privatising" publicly owned assets (water, gas, electricity etc) it was one of her predecessors as Conservative Prime Minister, Harold Macmillan, who describe this as equal to the folly of "selling off the family silver " to make ends meet.
This is doubly foolish when what is sold is an income bearing asset rather than a non-productive treasure.
Yet at two levels Britain and its government continue with this folly.
Just before the election the government flogged off a 40% stake in Eurostar. That gave an immediate £750m boost to the deficit reduction strategy but means that "future generations" (people politicians pretend to be very concerned about when it suits them) will be deprived of its income for their governments.
Yesterday George Osborne announced the sale of the government's remaining stake in the Royal Mail. Ditto.
But there is a "double whammy" with some of these sales. The UK's most serious deficit is not on the government's internal account but the nation's external payments account, the balance of payments. This is currently in deficit at the of almost 6%of GDP, way above any acceptable level. And some of these sales go to foreign owners.
Part of the sale of Eurostar went to the Canadian investment company Caisse de dépôt et placement du Québec, which means future Eurostar profits lead to an outflow of foreign exchange. And of course previously privatised railways and water companies are now in foreign ownership too.
Yet who is there left to object to this folly? Labour itself tried to privatise part of the Royal Mail, but failed. It was a Liberal Democrat business secretary who succeed, at a knock down price.
The long term way to improve our performance on the balance of payments is to improve our productivity. The long term way to reduce the government's internal deficit is to revive the economy and thus increase the tax-take. Instead of tackling these difficult issues we seem content to manage day to day with short-term sticking plaster measures.
All Britain's parties seem afflicted with this economic myopia. We need a party capable of lifting its eyes "unto the hills" of the long term The challenge for Liberal Democrats is to try to ensure that our revived party grows to fill that gap.
That gave an immediate £750m boost to the deficit reduction strategy but means that "future generations" (people politicians pretend to be very concerned about when it suits them) will be deprived of its income for their governments
ReplyDeleteBut isn't whether that's a good deal dependant on whether the future income would be greater than the interest payments on the debt that would otherwise have had to be taken out to cover the extra deficit?
(Unless I've made a silly mistake somewhere, have I?)
i don't know the figures, but it seems plausible that that might be the case. According to the internet, in one of the last few years Eurostar paid out £7.4 million to the UK government: http://www.travelweekly.co.uk/Articles/2014/09/22/49394/eurostar+pays+out+18.6m+in+dividends.html
So if the holding was worth $750million, that's just under a 1% return per year.
So if the long-term (ie, in a term comparable to the likely life of Eurostar as a viable business) interest on the £750 million debt they would otherwise have had to take out to cover spending would have been more then 1% (would it have been? I don't know what the UK government is paying for bonds these days) then selling was the right financial call, wasn't it?
Interests rates are at present at their lowest since the Bank of England was founded so your scenario is unlikely, though plausible. The "win-win" situation would be to reduce the internal deficit by investing in the economy and increasing the tax take, whilst still retaining the future income from the assets.
DeleteThe "win-win" situation would be to reduce the internal deficit by investing in the economy and increasing the tax take
ReplyDeleteAnd where do you get the money to invest in the economy?
Answer: you sell off your stakes in established businesses (like the Royal Mail or Eurostar), then use the revenue thus gained to invest in new infrastructure/business. The once that is established you sell it off and use the money to invest in yet more new infrastructure.
There's no point in the government holding stakes in established companies when it could — should — be investing in new-growth companies instead (and, as you say, by doing so growing the economy and therefore the tax take).
Government money tied up in share ownership is unproductive money which is not growing the economy (it's the governmental equivalent of banknotes stuffed under the mattress): it needs to be released (by selling off the assets) so that the government can use the liquidity thus gains to invest in economic growth.
If what you describe - governments selling off established but low earning operations and using the receipts to invest in new-growth enterprises - were indeed the object of the exercise, then you might have a point. However, the more likely current purpose is that the government is selling off national assets, whilst squeezing public expenditure, especially on social security, not in order to invest but to be able to offer tax reductions as a bribe to the comfortable at the next election.
ReplyDeleteTwo other points. First, there is a strong argument for keeping certain essential services in public ownership. This applies particularly in health and personal services, most education, prisons, policing and probation services, public utilities, and safety functions such as Air Traffic Control
Second, there is no evidence that the private sector performs any of these functions more effectively or efficiently (however defined) than the public sector. Nor, for that matter, more cheaply. I believe the privatised railway companies now receive about three times more subsidy than dear old British Rail.
However, the more likely current purpose is that the government is
DeleteThis is an argument from imputed motive: 'the government are bad people, so even if they seem to be doing a financially wise thing,they must be doing it for the wrong reasons'. And the thing about it is that it's impossible to ever argue against, because it is not based on what the government is doing or is planning to do, but on what the sort of people you reckon they are (ie evil) would do. And however much anyone points out that they have not in fact done the evil things that they were claimed to be going to do (how many one hundred days' have their been to 'Save the NHS' over the last few years?) it can be countered that because they are evil, they must just still be planning to do them, but later. And of course it's impossible to disprove the future.
But anyway. One thing that can be pointed out is that nothing which is done now, in terms of assets, can possibly enable a tax cut at the next election because whether a tax cut is possible at the next election will depend on economic condition in five years, and a £750 million sell-off more or less now will have no effect on that, compared to five years of geopolitical events.
If they really were using it to fund a tax cut, they would be better off keeping it public-owned for the next three years, then selling it off a year before the election. Then there's a chance the money might give them enough of a boost to help fund a tax cut. But five years in advance? No. It'll be eaten up by then. Things done in this year and next can't be being done with an eye on the next election, if they're doing them now they must be doing them on principle, not for electoral advantage.
And another thing that can be pointed out is that it is simply a fact that current spending is higher than current tax take, and that this gap has to be plugged somehow. It can be plugged by borrowing, or it can be plugged by selling assets. If the rate of interest on the borrowing is higher than the interest on the assets, then the financially correct thing to do is to sell the assets rather than borrow; is this not a simple fact, regardless of what the money is spent on?
Just like if you lose your job and therefore your own spending moves into deficit, you are better off selling low-revenue assets that taking on high-interest debt, in order to bridge the deficit period (while you try to move back to surplus, which may involve cutting expenditure if you can't find a job paying as highly as your previous one). Aren't you?
First, there is a strong argument for keeping certain essential services in public ownership
There is, though a debate can be had about where the line is drawn (for example, not all health service are in public ownership: GPs practices, for example, are and have always been privately owned).
However it is hard to see that Eurostar and the Royal Mail fall into the category of things so vital to the national security that they must be managed by the government.
I believe the privatised railway companies now receive about three times more subsidy than dear old British Rail.
I don't know the figures for Royal Mail, but I don't believe British Airways are receiving any subsidy; nor BT, nor British Gas, nor the owners of the various bits of British Leyland or British Steel.
On the numbers, there have been more successful (defined as companies in question becoming independent of public subsidy, and even perhaps revenue-generating) ones that unsuccessful ones, haven't there? It's just that it's the few unsuccessful ones which make the news.
We await to see whether Royal Mail's new owners are able to turn it into a profitable business, but based on the BT experience I wouldn't rule it out.
Often when public companies become privatised, the marker of success is not only financial performance, but also the quality of service these companies provide to the public, both directly, and indirectly by contributing to the community and environment and healthy employment (no zero hours.) Often private companies fail to meet the standard expected, e.g. ATOS, British Rail, selling of council houses, and when this occurs it is the government that has to pick up the tab. When the old council housing stock in london falls into the hands of private lenders, it is the government that has to increase housing benefit so people can afford to live there. Now energy prices have been driven up by the 'Big Six', the government has to introduce winter fuel allowance so the pensioners don't freeze. When privatisation of essential services, health transport, utilities, the government rarely ends up financially better off, and the public rarely experience a better service.
DeleteThanks, Harry Altoft. There is far more to business, and especially health and public services, than the "bottom line" of profit and shareholder value. That's why I'd like to hear more about "stakeholder" companies - a well established policy of the Liberal party (though we didn't call it that) and one which Labour toyed with for a while but seem now to have abandoned.
DeleteIn response to the last comment by Anonymous, you put up a good case, as always, but "by their fruits shall ye know them." We shall see.