When the government sold its shares in Eurostar (the London to Paris
train service) around a year ago, its primary motive according
to a recently published national audit office (NAO) report was to
reduce the level of government debt. [1] As the NAO says “Some
asset sales are justified by government on the basis that the sale
will result in improved efficiency for the business but this was not
the case with Eurostar.”
The key point with privatisations is that reducing current debt may
harm the health of the public finances. Any normal investor would
only sell an asset if they thought they could get a price that
exceeded what the asset was really worth. Although selling the asset
would reduce the government’s net borrowing today, it would
increase their net borrowing in the future because the government would not get
the dividends the shares paid out.
The fact that the government had the wrong motives is an unfortunate
by-product of debt or deficit targets. By necessity these targets
have to be ‘realisable’ (to use a term from my paper
with Jonathan Portes) - they have to be targets that are within the
lifetime of a parliament. But that gives any government an incentive
to effectively cheat: to sell off assets (like Eurostar) that help
meet targets in the short term, but make managing the public finances
beyond this more difficult. (This post
discusses the point in more detail.)
So how do we judge if selling Eurostar was a good or bad decision?
Reports
that there was a general belief that the value of the shares would
rise are worrying. To be honest I do not know the answer to this
question, but in essence that is my point. Given the clear danger
that the government will sell assets just to meet its short term
targets, we need some independent institution to assess whether the
government is being sensible or is cheating. (In some other cases,
like selling off the student loan book, the cheating is pretty
clear.)
The NAO had a remit which did not address these issues, although it
tries in its report to at least raise them. [2] The obvious body to
analyse and publicly report on issues of this kind is the OBR, but
this is also not in the OBR’s remit, and at present it can at best
only drop hints. With a large privatisation programme over the next
five years, the government was never going to extend the OBR’s
remit in this way, and (coincidentally?) the Ramsden review
does not seem to have addressed this issue directly. The OBR needs to
become not just a producer of forecasts, but more of a fiscal
watchdog.
Without some independent oversight of this kind, we will have the
irony of government ministers arguing that privatisations are needed
because we must reduce government debt for the sake of future
generations, when in reality they may be increasing the burden on
future generations. We need a fiscal watchdog to protect future
generations from shortsighted governments.
[1] Although the headline level
of public debt is often described as net, it in fact
only nets off liquid financial assets.
[2] The key
technical issue is discounting, and how you handle uncertainty. Even
if the government gets the current market price, that price may be
low because the private sector discounts future returns heavily. That
heavy discounting may reflect vulnerability in the face of
uncertainty, whereas the public sector has much less vulnerability.
