The December 2019 general election has been prompted by the need to resolve the impasse over Brexit (to “get Brexit done” or squashed). But both of the main parties want to use their other policies to try to broaden their electoral coalitions and compensate for their different weaknesses on Brexit.
Labour wants to keep Remainers angry at its equivocation over Brexit on board by emphasising its programme of redistribution and economic transformation. The Conservatives want to retain their angry Remainers by scaring them about Labour’s plans for spending and nationalisation.
Labour’s 2019 manifesto includes plans to renationalise some of the companies first privatised by the Conservative governments of 1979-1997. Proposals cover: water utilities, energy distribution and supply, Royal Mail, the rail industry, and BT Openreach and its supplier of broadband internet services.
The first line of attack is over the “cost” of nationalisation. The attack causes, and profits from, some confusion: confusion that arises because the state buying a company does not “cost” the exchequer in the same manner as other items of expenditure.
Suppose that we imagine that Labour acquire controlling stakes, or the entirety of these companies, by issuing government bonds. And that they run the companies as passive shareholders, overseeing them as commercial entities.
In this case, although government debt would rise by the amount needed to acquire the shares, the government would also acquire assets on its balance sheet. Although it would pay interest on the debt used to finance the equity purchase, those interest payments would be offset by a dividend flow from the businesses.
Thinking further ahead, one could imagine a subsequent government reprivatising the assets, selling off the shares at market value, and paying down the debt. The government finances would then be back to square one.
In the meantime, there would have been few fiscal implications for the Treasury. What effects there are come from the uncertainty about the commercial fortunes of the companies. These provide mostly essential goods, under conditions of limited competition, so they are good bets. But there are risks in management, potential for accidents and other liabilities, and so on. However, these risks are small relative to the extensive and fairly reliable tax-raising powers that governments have outside times of extreme crisis.
There lies the reason why the government buying a company is not like a private company buying another one, a comparison which seems like it should work, but, like many household/private firm/government finance comparisons, lets us down. When a private company buys another one, the fluctuations in the returns it gets from the acquisition can be very large relative to its other income sources and its capital. Potential lenders know this, and that is why private borrowing limits are much more easily felt.
The government taking on this risk would be a little like “credit easing”. Credit easing was the name given to a policy to combat the financial crisis — a good thing, in other words. Central banks or governments bought private assets to move risk off the private sector and onto the public sector, more easily able to bear it in hard times, in order to stimulate private spending. “Nationalising risk” in this way is sometimes necessary: a way to make the capitalist business cycle better, not part of an ideological war against it.
Moreover, part of the argument for nationalisation is that the government never managed, credibly, to privatise the risk. Private companies profited from, but did not pay for, an implicit guarantee, the ultimate source of which is the essential nature of what they do.
This almost-no-cost scenario is probably not all there is to it, however, because Labour may well not run the assets as commercial entities. After all, if they did, what would be the point? The thought experiment, while rebutting the simple line of attack on financing costs, points the way to where real concerns should lie.
There are several ways in which the government could depart from commercial management. One might be self-financing ultimately, or more so. If the companies are earning above normal profits, selling essential utilities for too much, or at too low quality, then the government can correct this, taking lower dividends directly, or reaping higher taxes through the general economic expansion that better utility provision leads to.
Other non-commercial ways of running the companies are more detrimental to government finances. The acquisitions can be used as a means of redistribution (lower prices or free services to the poor, for example). Or as a source of patronage: senior jobs for friends; concessions over wages and conditions to unionised workers. Or nationalised companies may end up badly-managed, with poor delegation by distracted politicians, or with below-market salaries for top management talent. In these scenarios, nationalised company assets might depreciate through underinvestment or poor decision making. Debt interest payments would not be matched by the same commercial dividends.
Even if a government did plan to manage the industries in a commerical manner, uncertainty about what it proposed to do could weigh somewhat in markets. But the effect of this — working off guesses at plausible worst-case scenarios for utility management — is likely to be small and tolerable, especially at current ultra-low interest rates, and it would diminish as evidence of how firms were actually run accumulated.
Contrast the economics of nationalisation with the Confederation of British Industry’s report on what it called the “up-front cost”. A press release warned: “This cost of renationalisation is equivalent to taking every penny of income tax paid by UK citizens in a single year — and also as much as the annual spend on the Health and Social Care budget [£141bn] and Education budget [£69bn] combined.” [Emphasis in original.] In this one sentence we have a description of something that is not a cost as a “cost” and the equation of a bond issue to acquire assets with current spending on wages and services in the health and social care services. The same tactic has been deployed by the Conservatives themselves, in a dossier covered by the Sunday press on 10 November.
Thinking through the fiscal implications of renationalisation is a mini lesson in the reasons for using a “net worth” criteria for judging public finances rather than more conventional criteria based solely on debts and deficits, as discussed in a recent paper by the Resolution Foundation’s Richard Hughes and now reflected in Labour’s new fiscal rules. But it also illustrates some of the difficulties with these proposals. Evaluating the net worth of complex companies, several years into extensive regime change with uncertain intent and competence, would not be straightforward and open to manipulation by both an incumbent government and its opponents.
Another area of concern over the renationalisations is how the companies would be acquired. Labour has suggested that the government would determine the price and that it would be below market value. These plans are hard to parse. Taken literally, they suggest an absurdity. As soon as the tactic is broached, market value falls, pricing in the possibility of partial expropriation. But then the threat still stands to buy at below the new market price; so the market price falls further, and so on in a death spiral. To make this work cleanly, we would need to impose a penalty on the hypothetical market price that evolved with the ebb and flow of news, but before the effects of partial expropriation had been felt in the price.
On the face of it, the price penalty seems to infringe basic, capitalist property rights. But the penalty is motivated by a concern over fairness: a desire to try to compensate the state — and ultimately its citizens — for the excess dividends shareholders received in the past.
If those could be clawed back and redistributed through lower taxes, a wrong would have been righted. Whether this hits the intended target or not is moot. If shares did not significantly change hands, a penalty on the sale price could indeed wipe out some or all of the excess dividends shareholders earned before being forced to sell to the government. On the other hand, a new shareholder taking ownership shortly before compulsory purchase, who bought on the expectation of future dividends, is penalised without having earned anything. The recent seller keeps the historic excess dividends, and the proceeds from the share sale based on their continuation.
The debate that needs to be had about actual or potential public utilities is not about “cost”. But about what social purpose they serve, whether they are serving it, and, if not, whether reforms to the regulatory framework or nationalisation is the best way to manage the assets to deliver better outcomes.
Tony Yates is former Professor of Economics at the University of Birmingham