Comment: The dishonesty of asset sales
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Monday, 12, Oct 2009 12:00
Gordon Brown's plan to sell off national assets commits the same mistake made by John Major, and Thatcher before him. It confuses capital with income.
By Stephen Barber
Gordon Brown's announcement of the sale of some £16 billion of public assets in an attempt to get to grips with the dire state of public finances not only re-confirms New Labour's acceptance of the Thatcherite consensus (something which might have been questioned in light of the Keynesian response to the credit crunch) but also threatens to repeat the mistaken understanding of the concept.
In 1984, the government sold off 51 per cent of British Telecom not because of a genuine philosophical belief in de-nationalisation, but for the more pragmatic reason that already profitable telecoms needed greater investment and as a state owned industry, increased funding would have counted as part of the public sector borrowing requirement. The sale of half of BT was bigger than any previous London Stock Exchange flotation and private investors who stumped up the near £1000 to buy the new shares saw the price double by the end of the first week. The sale heralded the privatisation programme for which the Thatcher government is remembered and was continued throughout the Major and Blair years taking on a dogmatic zeal of its own.
But the sale of capital was too often treated as the raising of income. And the Thatcher government used privatisation proceeds to pay off government debt. Prime minister Brown is doing a similar thing with these plans to sell the Tote, student loans and the channel tunnel rail link (not exactly the jewels in the crown). By using these proceeds for the practical reason of short-term finances, government confuses capital with income. They act a bit like people who re-mortgage their homes and use the funds not to add to the capital by building a new kitchen but treat it as earnings by, say, going on holiday. The dishonesty comes, not from selling assets, but by using the proceeds as income.
The problem for the Treasury is that the sale of an asset does not reduce purchasing power from the economy in the way that a tax rise does, for instance. While it might reduce public debt, it has the balanced effect of reducing public assets by the same amount. By selling off assets in this way, there is little eventual difference in the worth of the public sector or disposable income for the rest of us.
The sale of these public assets might help to make a dent in the public finances which are sore as a result of government’s inflationary response to recession. These particular state owned outfits will cause little philosophical debate in their move to the private sector and, unless one is opposed in principle to de-nationalisation, do not in themselves constitute controversy. But government must distinguish between capital and income and be honest about the longer-term effect of changes on public assets.
Dr Stephen Barber is an academic at London South Bank University and resident economics commentator at politics.co.uk.
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