Winner of the New Statesman SPERI Prize in Political Economy 2016

Monday 21 July 2014

Fiscal deceit

Vince Cable, the LibDem minister whose remit includes UK student finance, is apparently having cold feet about the plan to privatise the student loan book. Which is good news, because if ever there was an example of a policy designed to lose money for the public sector (or, as they say in the media, cost the taxpayer more), it was this.

As I explained in this post, if a public asset that generates income is privatised, the public gains the sale value, but loses a stream of future income. The ‘debt burden’ need not be reduced, because although future taxes will fall because there is less debt to pay interest on, they will rise because the government has also lost a future income stream.

With assets like the Royal Mail, we can debate endlessly whether the asset will become more or less efficient under private ownership. If it is more efficient, and therefore profitable, under private ownership, the private sector might be prepared to pay more for it, and so the public sector (and society) is better off selling it – unless of course the government sells it at below its market price! However in the case of the student loan book, it is pretty clear that privatisation is a bad deal for the public sector for two reasons.

First, as Martin Wolf has pointed out, the revenues from student loan repayments are very long term, and pretty uncertain. Any private sector firm that might buy this book is likely to discount these revenues quite highly, and so will not be prepared to pay the government enough to compensate the government for the lost revenue. Second, as Alasdair Smith points out, the main efficiency issue is collecting the loan repayments. Here the government has clear advantages over the private sector, because loan repayments are linked to income, and the government has all the information on people’s income, and an existing system for collecting money based on income.

So selling the student loan book is an almost certain way of increasing the ‘debt burden’ on current and future generations. As Alasdair Smith reports, George Osborne justified the sale by saying that it helped the government with a ‘cash flow issue’. As Alasdair rightly says, the government does not have cash flow issues. This kind of ludicrous policy either comes from ideological fundamentalism (the government shouldn’t own assets) or the need to meet ridiculously tough deficit targets. Whichever it is, every UK citizen loses money as a result.

George Osborne is hardly the first finance minister to play tricks like this, so how do we stop future governments from doing the same? I’m glad to see more journalists, like Chris Cook, making the points I make here. However it would be better still if an independent body, set up by the government to calculate its future fiscal position, was charged with a statutory duty to make these points. At present the OBR does not have that duty, and it feels naturally reluctant to go beyond its remit and pick fights with the government. However, if it became more of a public watchdog, with a remit to flag government proposals that appeared to lose money for the public sector in the long term, that might just stop future governments doing this kind of thing.


  1. "If it is more efficient, and therefore profitable, under private ownership, the private sector might be prepared to pay more for it, and so the public sector (and society) is better off selling it – unless of course the government sells it at below its market price!"

    Well, no. It is better off selling it if the capitalised value of the income it receives from the asset is lower than the price sold at.

    That does indeed seem to have been the case with Royal Mail, at least according to the NAO, with the sum received generally accepted to have been (far) above the capitalised value of the income stream to the State.

    It would have course have been better to have got even more, but that is not an argument against privatisation per se,

  2. Whilst it is merely parochial I am taken back many years to a comment made by Peter Lynch of Magellan fame who basically said that any time the UK or US government wanted to sell off a publicly owned asset he would be the first in the queue. I think we can take that to mean essentially the same thing that you argue which is that the private sector owners will be the ultimate winners not the tax paying client base.

  3. Prof:
    You're missing a key point.
    If spun off to a private sector investors, their company could set up a fake internal law firm, say Kneecap, Legg and Braike LLC, to hound, intimidate and otherwise terrorize delinquent borrowers, students who graduated and could only manage to find work as baristas at Starbux and who lack the wherewithal to repay the loans. Now that might be an efficiency gain investors might be willing to pay for. (Government lacks the entrepreneurial moxie for this kind of innovation).

  4. The Government should donate the loans to the USS pension fund to plug the 'deficit' there. That scheme seems also to be mired in the same debate about 'market values'. Is there a New Keynesian treatment of pension deficits?

  5. If the private player ran into financial trouble the government would just bail them out anyway. Taxpayer loses any which way. Gotta love "capitalism" these days.

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