Asset sales have become a bit of a feature under the current Chancellor in his attempt to meet debt reduction targets.
In the Spending Review, it was announced that Government will explore selling its 49% stake in NATS (National Air Traffic Services) and look at options for privatising the Land Registry. Government also has a more general long-term ambition to sell Government-owned assets, and set up UK Government Investments to deliver a £23 billion programme of asset sales – including bank shares and its stake in Eurostar – earlier this year.
A key question, however, is whether this makes sense for the taxpayer.
There are a number of non-financial reasons why Government should sell such assets. In some cases, the private sector might run such assets more efficiently. In other cases, privatisation could be a route to creating a more competitive market with more than one provider.
But if the fundamental reason behind selling an asset is to improve the public finances, then it is clear that part of the criteria must involve balancing the money received by selling the asset today against the revenues that would have carried on flowing to Government if the asset had remained in Government hands. NATS, for example, generated £450 million in turnover and £82 million in operating profit in 2013-14.
But how should sales proceeds today be balanced against further income tomorrow? Ignoring inflation for the moment, suppose you had an asset that you could sell for £100 to pay down your debt. But this asset gives you a 10% annual return. To decide whether to sell or not, you would need to compare this 10% annual return against the interest rate you pay on your debt. If that debt interest rate is, say 15%, then you are probably better off selling the asset and repaying debt. If it is, say 5%, then you would make more money in the long-term by keeping the asset and not paying down your debt straight away. So the asset return needs to be compared to your cost of borrowing to work out how valuable it is.
For Government, the cost of borrowing has been falling over recent years and has recently been at all-time lows. One might, therefore, think that this should change the costs and benefits of selling assets to pay down debt. In fact, there was a sign in this week’s Spending Review that Government does indeed think that the relative value of its assets has changed because its cost of borrowing has fallen (Paragraph 2.76 of the Spending Review).
Or at least on one asset – student loans –the Government’s Spending Review effectively said that it now values the further income (comprising future interest and principle repayments) from its portfolio more highly than it used to – because its cost of borrowing has fallen. As pointed out by an IFS paper when the changes were first mooted, this makes the student loan system look cheaper.
But it also begs the question of why the same would not apply to revenues generated by other assets Government holds, and why we are embarking on more asset sales now, when borrowing costs are so low. Perhaps the answer is that asset sales help reduce debt in the short-term, which nicely fits with the Government’s targets. But the end result – as often pointed out by the OBR – is that debt simply goes up again later.
Nida Broughton (@fiveminuteecon) is Chief Economist at the Social Market Foundation (@smfthinktank), an independent public policy think tank, where she leads research on public spending, employment and economic growth.
I’m not saying that you are wrong, but by the same logic it would make sense for the government to borrow to invest in a large portfolio of listed shares since, over the long-run, one would normally expect the return on equity to be higher that the government’s borrowing costs.
Like a sovereign wealth fund?
Jo, could you settle an argument between two legal novices, one being myself. Does a judge or judges sitting on judgement on a case or it’s subsequent appeal, if that should follow, sometimes inform in advance the barristers or QC’s of their ruling or judgement in the case. I was involved in a case which went to the high court in Edinburgh, i was told several weeks in advance by my lawyers the judge was ruling in my favor, which was then duly recorded in my favor a numbers of weeks later.
How many sovereign wealth funds are funded by borrowing?
I guess that depends on what you mean by “funded by borrowing”. It is not unknown for a sovereign wealth fund to be established by a state running a current account deficit, so in a sense that investment is funded by borrowing. And even states running a surplus (and investing in sovereign wealth funds) have been known to take on more public debt.
“Several weeks in advance” sounds unusual, but I think it is reasonably usual (or, at least, not unknown) for a draft decision or judgment to be provided to the lawyers and the parties (on an confidential and embargoed basis) so any obvious factual errors, typographical mistakes, etc, can be corrected in advance. It is not an opportunity to reargue the case. That said, sometimes the judgment is published with little or no advance notice.