Winner of the New Statesman SPERI Prize in Political Economy 2016

Saturday, 7 November 2015

Privatisations: why we need a fiscal watchdog

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.  

32 comments:

  1. Nationalise or privatise isn't the argument. That's like left or right. It's an old battle that is no longer relevant in the 21st Century.

    Government does not borrow money. All spending works by crediting bank accounts and tax works by debiting bank accounts. Gilt issuance is separate from this but the government have made the Treasury voluntarily issue Gilts in the same amount as the government "deficit." If this was not in place and we had a tap system (like in Australia up
    until the 1980s, it would be obvious.
    Have a look at the diagram on 22. here:
    http://www.parliament.the-stationery-office.co.uk/pa/cm200102/cmselect/cmpubacc/349/349ap02.htm
    Also take a look at HM Treasury's remit to the DMO;
    https://www.gov.uk/government/publications/debt-management-offices-exchequer-cash-management-remit-2012-13
    And here:
    http://www.bankofengland.co.uk/markets/Documents/sterlingoperations/summaryops130502.pdf
    Importantly what this arrangement of accounts tells you, along with the description of the way Reserve accounts work at the Bank of England, is that spending is disconnected from the debt management operation. All entities operating at the Bank of England have an interest free overdraft available during the day to absorb flow differentials, and this effectively means that they spend on their accounts and then back fill (or under fill) to the target account balance using standard asset and liability optimisation mechanisms.

    Very likely some of the government spending flow out to the private sector stock accounts earlier in the day will flow back later in the day to the National Loans Fund in exchange for Treasury bills or Gilts as a completely separate transaction. Spending therefore demonstrably comes first. Moreover it is in the Debt Management Office's interest for that to be the case since it ensures there will be healthy demand at the funding auctions.


    So the question is how to get maximum productivity in those industries and therefore maximum public good.

    The problem is entropy, which you get in any human organisation. Over time things get set in their ways, which is good in one sense in that people have got used to working with each other and are 'performing', but can be bad because you end up getting rigidity. It worse in larger organisations as the politics starts to overtake the need to survive.

    So it's never a matter of public or private, but more a question of the age and size of the current operation. You don't want a very new organisation because they haven't worked out the best way of doing things yet, but you don't want a very old organisation that is set in its ways. You don't want a very small operation because it is inefficient, but you don't want a very large one either because it becomes an oligopoly.

    Capitalism works, if it works at all, when there is an appropriate level of destruction and fear of destruction. Strange as it may sound the supermarket sector in the UK works really well. The operations are large enough to be effective and the competitive heat is enough to ensure constant innovation. It's not perfect and needs a Job Guarantee to provide sufficient competitive tension in the labour market to prevent exploitation by the supermarkets. But its a lot better than what they have in, say, Nick Rowe's paradise Canada.

    On the public side the assets should be owned by the state and the workers should be hired and paid for by the state, but the operational management layer should be outsourced on a fixed income contract. That way you can swap out operational management layers if they fail, and they can make a lot of money if they are able to deliver the service more efficiently.

    It's all about the best way of transforming labour power into labour services. And that ain't as easy as it sounds.

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    1. I do wish you and others would stop making silly statements like 'the government does not borrow'. The only way to make sense of this statement is the government does not have to borrow because it can create money. Of course. But the government chooses to regulate its creation of money for good reason.

      And what has this got to do with the issue raises here. Absolutely nothing!

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    2. "I do wish you and others would stop making silly statements like 'the government does not borrow'. The only way to make sense of this statement is the government does not have to borrow because it can create money."
      Please look at this chart.
      http://www.parliament.the-stationery-office.co.uk/pa/cm200102/cmselect/cmpubacc/349/349ap01.gif
      Gilt Issuance is disconnected from the spending.

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    3. "The only way to make sense of this statement is the government does not have to borrow because it can create money. Of course. But the government chooses to regulate its creation of money for good reason."
      They are the same thing. There is no functional difference between the Treasury creating an entry on a computer and the Bank of England creating an entry on a computer. The only difference is the interest rate - which is determined by Bank of England action in both cases due to its control of monetary policy.

      The view of the world you have is simply wrong.

      The government has no need of borrowing. However the private sector has great need of saving and the state offers Gilts so that they can.

      Once you get beyond the idea that you are ripping money from unwilling hands you see that government spending is *necessary* to overcome the paradox of thrift.

      And it has to be sufficient to engage *all* idle resources - regardless of whether some accountant arbitrarily determines them to be capital or revenue.

      For example, education and training is current expenditure.

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    4. "government does not have to borrow because it can create money. Of course. But the government chooses to regulate its creation of money for good reason."
      Please kindly explain what has been going on in Japan for the past three decades then,
      "We also learned at that time that the Bank of Japan was buying up government debt at its leisure, from which we conclude that the Bank of Japan is a monopoly supplier of bank reserves denominated in Yen.

      We now have much more data available (to August 29, 2014) and since then the Bank of Japan has conducted itself in an admirable fashion and demonstrated that private bond markets are effectively irrelevant to the course of public debt yields should the central bank desire that to be the case.

      We also have a living laboratory to show that governments that issue their own currency do not have to issue debt to the private markets.

      And,we are also being shown in real life, that inflation does not accelerate out of control if they do not issue debt to the private markets but rather the central bank buys the majority of the new issues up.

      You cannot beat reality!

      There was an article in the Economist Magazine (August 30, 2014) – Quantitative freezing – which considered recent developments in the Japanese bond market.

      It noted that:

      AS PART of its quest to end Japan’s 15-year-old deflationary torpor, the Bank of Japan is buying around 70% of all newly issued Japanese government bonds (JGBs).

      The following graph shows the annual purchases of Japanese Government Bonds (JGBs) since the January 2005 to July 2014 by the Bank of Japan (blue line) and the Non-Government sector (red line). I didn’t plot the purchases made by Japanese government agencies.

      There has been a dramatic increase since the beginning of 2013 in Bank of Japan purchases. In fact, the Bank of Japan purchases have exceeded the primary issue and run down the stock held by non-government sector wealth holders."
      70%! So where is the predicted inflation? Why has "printing money" not caused catastrophe?
      http://bilbo.economicoutlook.net/blog/?p=28918

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    5. The sentence 'the government does not borrow' and 'the government does not have to borrow' have a different meaning in anyone's language.

      You seem to agree that the only difference between issuing debt and creating money is monetary policy. That is exactly what basic macro says.

      Take another sentence above: 'government spending is *necessary* to overcome the paradox of thrift.' No it is not. If by this statement you are really trying to say 'when monetary policy does not work then fiscal policy has to be used to ensure sufficient aggregate demand' then fine, but that again is just standard macro.

      These attempts to pretend standard macro suffers from some kind of massive error when it is perfectly possible for you to make your points using that standard macro is just odd.

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    6. "The only way to make sense of this statement is the government does not have to borrow because it can create money. Of course. But the government chooses to regulate its creation of money for good reason."

      But there is no difference. Money is still created. "borrowing" and "printing" are the same thing in the round. Money is spent from HM Treaury's Cash Buffer, some comes back as tax. Whether the rest ends up as Reserves or Gilts is a technical matter.

      You can't really "borrow" a currency you issue yourself. It is far more useful, at least from an MMT perspective, to view the government as offering savings.

      "Take another sentence above: 'government spending is *necessary* to overcome the paradox of thrift.' No it is not. If by this statement you are really trying to say 'when monetary policy does not work then fiscal policy has to be used to ensure sufficient aggregate demand' then fine, but that again is just standard macro."

      No. What I am saying is spending is necessary to overcome the paradox of thrift. I'll try and explain what I mean (but be patient) :)

      If you and I have only £10 between us then there is a limit to how fast we can move it between us in exchange for goods and services. That's the natural friction within the system (and is lower in the financial sector which is how it appears it generates so much money. Really its just a velocity shift).

      However if there is more money in the economy - say £1000 then we can each have savings and still have enough liquidity to move real goods and services between us as fast as a possible in the real sphere.

      Which is actually what we need.

      The belief that is wrong is that the system naturally has enough liquidity. It doesn't. The unemployed have insufficient liquidity to demand the goods and services they need, which if they could would actually result in them being employed.

      And the paradox of thrift caused by financial saving just isn't automatically offset by sufficient loans from banks. The market doesn't 'clear' at full activity, the quantity wanders up and down dependent entirely upon its own dynamic and with little direct connection with the real activities that need financing.

      Money is made round to go around. What matters in turnover of money stock, not the size of the money stock.

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    7. "Whether the rest ends up as Reserves or Gilts is a technical matter" No, its monetary policy - its what determines the rate of interest. Suppose the government offered no gilts, and financed everything by creating money. Do you think it could also set a high interest rate? Of course not - there would be a huge demand for financial assets that would push rates down.

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    8. "No, its monetary policy - its what determines the rate of interest. Suppose the government offered no gilts, and financed everything by creating money. Do you think it could also set a high interest rate? Of course not - there would be a huge demand for financial assets that would push rates down."
      My point was it was not to "finance" the spending.

      Huh?

      You can set rates to zero (no Gilts or interest on reserves) and just offer National Savings.

      A simple pension savings plan at National Savings, along the lines of the Guaranteed Income Bonds and Indexed Linked Savings Certificates, would solve the problem permanently, would be limited to individuals, and would allow them to manage their risk profile as they approach retirement (they would sell out of risky assets and transfer the money to National Savings).

      Since it would be only available to individuals and there is no need to pay middlemen, it is clearly far more efficient than the current Gilt issuing system.

      Functionally they are a form of guaranteed income bond - like the other savings certificates issued by National Savings. In fact in the not too distant past you could purchase Gilts via National Savings as an alternative to the products National Savings issued itself.

      But there is one key difference. National Savings Income Bonds can only be bought by individuals, there is a fixed holding limit and they are non-negotiable (i.e. they can't be transferred - only sold back to National Savings or held until maturity), whereas Gilts can be held be any entity national or international, in any quantity and traded in a marketplace.

      Once you understand that Gilts, like Savings Bonds, attract regular income and are a government annuity paid by the state to the holder of the Gilt, then you have to start assessing it like any other recipient of a government benefits - tax credits, state pension, disability benefit, housing benefit.

      In other words what is the public purpose of providing the Gilt holder with a state income?

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    9. I'm trying to understand this. Is the idea that government borrowing is as potentially inflationary as is creating new money and that as such there is no reason, except as a service to those who wish to buy government bonds as a safe store of value, to prefer government borrowing over new money creation and no reason, therefore, for the state to pay, in the form of interest, the purchasers of government bonds for the service that they are providing - since they are providing no service?

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    10. «Once you understand that Gilts, like Savings Bonds, attract regular income and are a government annuity paid by the state to the holder of the Gilt, then you have to start assessing it like any other recipient of a government benefits - tax credits, state pension, disability benefit, housing benefit.»

      Sure, but as SimonWL argues that has to be assessed against its alternatives, which are also costly in their own way, e.g. the impact on the target inflation rate. When as recently the BoE has (very conservatively) judged that monetizing government debt would not impact the inflation rate they have bought them, and currently a large percentage of government gilts is "owned" by the BoE, just like in the USA and for several government in the eurozone by the ECB. Government debt monetized by the central bank has a zero effective interest rate.

      Anyhow arguments by people who misunderstand or misrepresent MMT as an alternative magic-money-tree are especially tiresome and pointless for countries that pay nugatory interest rates anyhow in the current circumstances.

      Also formal state debt, not just "currency", has political and psychological effects, it gives debt owners a stake in the fiscal health of the government, in a way that currency issuance does not, even if they are mostly equivalent. Especially when denominated in a "hard" foreign currency of course... But that is a difficult topic.

      But the number one current purpose of gilts has nothing to do with "economic policy" narrowly defined: they are created mostly for the purpose of giving financial speculators like banks and hedge funds a form of AAA collateral for multiple rehypothecation. When during the Clinton presidency in the USA the government fiscal balance went into surplus there were worries that if this continued the supply of dollar denominated AAA collateral would shrink and financial speculation would become also have to shrink.

      pragcap.com/you-cant-handle-the-truth-2
      «Assume a customer of the prime broker has pledged $100 million in securities against a debit balance of $50 million, resulting in net equity of $50 million. The prime broker can now rehypothecate up to 140% of the client’s debit balance or $70 million. In other words, the prime broker can borrow $70 million against collateral that has already been used by the customer to secure the original loan and it doesn’t stop there. Successive rounds of rehypothecation are permitted; however, if you think this is a bad practice, it is about to get a great deal worse.
      In the UK, unlike the US, there is no cap on rehypothecation. No prize for guessing the game the global investment banks have been up to.»

      Many of the sell-side Economists have been loudly complaining for a while that the main problem of the neoliberal economy has been an insufficient supply of safe assets with which to collateralize financial speculation (largely because a lot of "safe" asset collateral turned out to have been based on fraud in 2007-2008). And in the neoliberal model financial speculation generates a "wealth effect" for wealthy asset speculators that "trickles down" into the real economy. Consider for example that essentially all (or more) of the GDP growth in the past 30 years in the UK has been funded by asset stripping the capital gains on residential UK property resulting from financial speculation.

      MMT is just a description of the way things actually works; it may be useful in understanding some of the more comical mediamacro propaganda, but the really important issues in policy are safely kept completely outside the "mediamacro" window.

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    11. Yes. Any kind of spending can cause inflation if it outstrips real resources. "Borrowing" means paying interest which is more spending.
      The idea is that "printing money" creates "high powered money" we know this to be BS. Look at the evidence on Japan.
      We know the money multiplier model is BS and that when banks make a loan they create a deposit, expanding both sides of the balance sheet. In most countries, including the UK there are *no* reserve requirements. Even the Bank of England have admitted as such:
      http://www.bankofengland.co.uk/publications/Pages/quarterlybulletin/2014/qb14q1.aspx
      http://www.3spoken.co.uk/2014/07/on-nature-of-banks-payment-clearing.html
      Now if you withdraw that deposit as cash or transfer it to someone outside the current bank then the bank has to settle with govt IOUs (money) but banks have access to reserves at the discount window at the "penalty rate."

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    12. "Many of the sell-side Economists have been loudly complaining for a while that the main problem of the neoliberal economy has been an insufficient supply of safe assets with which to collateralize financial speculation (largely because a lot of "safe" asset collateral turned out to have been based on fraud in 2007-2008). And in the neoliberal model financial speculation generates a "wealth effect" for wealthy asset speculators that "trickles down" into the real economy. Consider for example that essentially all (or more) of the GDP growth in the past 30 years in the UK has been funded by asset stripping the capital gains on residential UK property resulting from financial speculation."
      Yep. You can either have "bubble up" or "trickle down." If you tax hard on assets at the high end and inject money at the bottom via a Job Guarantee you get a more equal distribution.
      The other thing the MMT Job Guarantee does is solve a *very significant* micro problem - that of commuting and the waste associated with it. The JG creates job where people live and deals with spatial and regional changes (e.g North in recession, London booming.)
      Of course the costs of unemployment are very high and more than "deadweight loss" micro inefficiencies.

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  2. Supposing the buyers' information is as reliable as is the seller's, isn't any circumstance in which we can find a buyer for government held assets a circumstance in which we should be unprepared to sell?

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  3. "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. "

    That very point was the major reason why I was so furious that the German diktats that Greece sell off assets to "improve its fiscal position" got a free pass.
    Of course (and you can see that in the fact that for several of those assets, the name of the future buyer, invariably a German company or institution, was fixed in the document Tsipras had to sign) the real goal was to get cheap assets at firesale price. But the argument made was one of fiscal responsibility, and I never saw that disputed in the press.

    40 years of propaganda have led to a situation where, while the economics, because of the difference in discount rates, should give a tendency for assets to become public as they are worth more to the state than to private actors, except where there is a major reason for their being private making them much (the difference in discount rates is colossal) more efficient, the common wisdom is that state assets should be sold unless there is a huge popular fight for them not to be - and even then it may be attempted through the back door.

    And this is before including the impact of externalities, which is another thing that makes many assets better valued by the public than the private sector.

    We live in an upside-down world.

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    1. I agree - its a mediamacro world, where political interests can mean that basic economics is ignored.

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    2. The point about the discounting advantage of the public sector is very important and needs to be made more often. Two implications come to mind.

      First, it should remind us of how valuable public support was in the financial crash. Even where assets purchased at that time are eventually sold back to the private sector at or even above the same price that was paid for them, there has still been a very large transfer as the purchased assets would have been close to valueless at the time without the willingness of governments to accept risks that the private sector would not.

      Second, the discounting advantage is further support for the case for public investment. To take the example of housing, the low rates at which the UK government can borrow today make it viable to undertake a large-scale building programme that would be self-financing at below-market rents even after service, administration and maintenance charges. Indeed it could reasonably be expected that the public sector would retain a large stock of usable housing assets after the loans had been fully amortised. If the media and others would look at both sides of the public balance sheet rather than only at the debt column, the advantages of such a programme would be obvious.

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    3. Lyn, what is your view on building new social housing to the Passivhaus standard?
      http://www.independent.co.uk/news/uk/home-news/adopting-passivhaus-building-standards-could-allow-people-to-heat-their-homes-using-power-emitted-by-a6707656.html

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    4. We have to get the costs right but Passivhaus has great promise for both climate change and energy charges. Here in Wales the assembly government has worked with housing associations on some pilot homes and has also contributed to the cost of a new school being built to this standard.

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    5. "We have to get the costs right"
      It would be funded by the UK govt. i can see it as part of PQE - if the staff are free.

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  4. Has any privatisation been a success for the tax payer or the service user. The transfer of natural monopolies to the private sector has been a play straight out of the rentiers hand book. The Post Office sell off being a classic example , including a 25 million bung to the Chancellors best man.
    The sale always at below market price with under-writers fees at the top end of the range for charges, always benefits the City and it's lobbyists , with rentier inflation linked charge increases build in, is classic 18th and 19th century toll-both economics. If you want a more coherent description of the process try Michael Hudson's The Bubble and Beyond or Killing the Host.
    Privatisations have benefited the 1% and the rentiers , paid for by the long suffering customer and subsidised by the ripped off tax payer. The tragedy is that the Labour Party new or old version bought into this theft. Even when the farce reaches it's end point, with the Chinese communist government and the Nationalised French electricity company being bribed to build us the most expensive Nuclear plant in history and still no one asks what is happening and running the crooks out of town. Everyone seems to be scared to point out the emperor is stark naked. It's a further illustration of how useless our neo-liberal political class has been for the last 30 odd years.

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  5. A lot of concern for "future generations" in this post. That's good to see (your heart is there) ;)
    A government can do daft things - join the Euro, borrow in a foreign currency, sell bank shares at a loss, but a subsequent government is not bound by those actions and can simple reverse them.
    Fiscal space is the real resources in the country. If you want to help young people (like myself!) then introduce 100% land value taxation, so housing is affordable. Also not using up renewable resources and making growth as high as possible so we have more fiscal space in the future. Thanks :)
    I can see you are still in the borrow, forgive, borrow mindset not the issue, redeem mindset so how bout a thought experiment...
    Imagine if it is 2030 and a prophecy has foreseen that the great Wren Lewis shall becomes dictator of the UK in a coup 5 year later. All shall be teared down and a new currency, the Beard, shall be issued. The national debt shall be defaulted upon. Private property survives the transition. Bond holders have a magic spell that shall prevent them from knowing the prophecy.
    Should the government:
    a ) work toward maximum output five years later?
    b) work at reduce the debt to gdp ratio?

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    1. ««If you want to help young people (like myself!) then introduce 100% land value taxation,»

      Well, you seem to belong to a small minority, because many millions of young (and early middle aged) voters are just waiting for the fabulous moment when they inherit a house in the South»

      There were loud protests when the Osborne cabinet delayed the promised massive rise in the inheritor-windfall tax lower bound:

      http://www.telegraph.co.uk/finance/personalfinance/consumertips/tax/9861439/David-Cameron-abandons-inheritance-tax-pledge.html
      «George Osborne, the Chancellor, will announce that the level at which inheritance tax becomes payable will be frozen at £325,000 until at least 2019 to fund reform of the social care system.» «It was seen as a “totemic” commitment that demonstrated that the Tories were in touch with the concerns of ordinary Britons as people prudent enough to save money for future generations were being protected.» «Nick deBois, the MP for Enfield North, said "in what is otherwise a good first step in dealing with social care, I am concerned that having built our reputation on inheritance tax moves, we should not jeopordise that and I hope we can look at other ways to pay for this. Some will see this as a tax on aspiration and that is not the right thing to do".»
      «In his speech to the Tory conference in 2007, Mr Osborne was credited with reviving the party’s electoral fortunes with the pledge to increase the inheritance tax threshold to £1 million.

      He criticised the tax as hitting the “aspirations of ordinary people” and said that in a “Conservative Britain” people would “not be punished for working hard and saving hard”.

      Mr Osborne said: “When inheritance tax was first introduced it was designed to hit the very rich … Instead, thanks to Gordon Brown, this unfair tax falls increasingly on the aspirations of ordinary people. “These are people who have worked all their lives. People who have saved money all their lives. People who have already paid taxes once on their income. “People whose only crime in the eyes of the taxman is that instead of spending their savings on themselves, they want to pass something on to their families. People who feel the most basic human instinct of all: they aspire to a better life for their children and their grandchildren.”»

      Hard-waiting people expecting to receive wealth between 325,000 and 1,000,000 pounds. So typical in the North of course :-).

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    2. “Instead, thanks to Gordon Brown, this unfair tax falls increasingly on the aspirations of ordinary people. People whose only crime in the eyes of the taxman is that instead of spending their savings on themselves, they want to pass something on to their families. People who feel the most basic human instinct of all: they aspire to a better life for their children and their grandchildren.”

      So many of my pet peeves crammed in so little space of manipulative speech...

      First, since when has the existence of a tax meant that a crime has been committed? This coming from a government that precisely does not want to tax externalities, it is particularly rich.

      Second, "unfair"? This is the one tax that does not hit anyone or anything alive. Can't do much better than that...

      Third, if they wanted to pass it to their families, they had the opportunity to do it while they were alive. They precisely did not do so, which seems to indicate that this was not their main aim. When I choose to make a gift, which I do often, the way it works is that I cease to own whatever it is I am giving the moment I make this gift. I resent that people whose position in life comes mainly from having been born in wealthy family should try to associate their self-serving acts with actions of generosity.

      Fourth, what does he mean "instead of spending on themselves"? If I buy myself a mansion, did I not spend the money on myself? Hardly an act of incredible frugality (which needs not be a positive quality in any case, certainly during a demand-led depression).

      Fifth, the last sentence misses "at the exclusion of everyone else's children and grandchildren". Aspiring to a better life for the many also is a basic human instinct -humans are much the most social of the great apes. Why should we favour the exclusive version of that instinct?

      Of course, he throws in for good measure the "has already been taxed" canard. There is no such thing as a pure, untaxed penny. Money circulates, is taxed at various junction, you pay VAT on transactions made with money that has been subject to income tax, which came from your company's revenue which faced its own taxes... There is nothing special to the transaction transferring an estate to its recipients that should make it shocking for it to be taxed. Unless - which of course is where people like Osbourne are getting- you are implying that the deceased and his heirs are, for all intent and purpose, the same person. Hey, the Duke of York died and the Duke of York will move into the palace.

      The implicit statements that they are distilling are very insidious.

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  6. Should there be a reciprocal arrangement that assesses whether currently privatised sectors like the railways and energy companies could be nationalised and produce better medium- to long-term benefits given current market failure?

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  7. «where political interests can mean that basic economics is ignored»

    While instead the macro commentary by "philosopher-king" Economists from Oxbridge is not political at all, just "basic economics" indeed :-).

    If so, your arguments apply much more so to Right-To-Buy for the past 30 years, and to the bailouts of immensely bankrupt financial corporates in the City.

    Consider for example the terms recently re-instituted by the Osborne cabinet for Right-To-Buy:
    http://www.independent.co.uk/news/uk/politics/social-housing-in-crisis-as-too-many-homes-are-sold-under-right-to-buy-9684172.html
    «Social Housing can now be sold at a discount of 70 per cent of its value, with a capped saving of £77,000 across England and £102,700 in London boroughs.»

    That's basically £77,000 or £102,7000 instant wealth gift to a small subset of newly-minted tory voters.at the expense of all voters. And never mind the colossal amounts spent to protect the small number of City jobs that pay a «decent living» (in the "The Economist"s words) to the «next generation» of scions of the tory elites .

    Where were the calls for a fiscal watchdog then? There were some but not that much because such massive government handouts were politically irresistible. The tiny privatisations currently being made are unfortunately politically irresistible too, so calling for a fiscal watchdog just now is too little too late and still pointless.

    The purpose of these privatisations is not just to deliver instant wealth to some City speculators, and to buy a small number of private investors, but to asset strip the "family silver" to keep interest rates low and property prices booming, and that is immensely popular.

    Because there is a fact of UK politics that is very similar to a similar fact in USA politics: the vast majority of voters resent bitterly only those government handouts that go to people in a lower class than themselves, to the "others". They don't mind even huge government handouts to people in their own class or higher, to "ourselves" or "our betters". That is redistribution downwards is resented bitterly, but redistribution sideways or upwards is not. So welfare to poor or disabled people mostly in the Noth are considered a monstrous evil, but "tory pension pensioner bonds" paying six times the "market interest rate" to affluent pensioners (presumably mostly respectable ladies mostly in the South) that have £10,000-£20,000 cash lying around are popular.


    All the southern middle classes that have vastly profited from Right-To-Buy and thirty years of government sponsored redistribution upwards from people with less property in the South to people with more property in the South are by now totally compromised by it: they cannot begrudge other people's (in the City or elsewhere) good fortune in being given huge handouts as instant government arranged capital gains.

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  8. The usual quotes to show how popular sideways or upward redistribution, involving short term capital gain, is, and how politically useful they are in creating new tory voters.

    As to original privatisations, and in particular this quote from E Currie's diary of 1987-09-09:

    «John Prescott on TV tonight that no, they knew it was unrealistic to take back shares without compensation, but that "compensation" will be the shares' original price; and Alan Tuffin (of the UCW) pointing out that nine million shareholders will vote against that won't they?»

    As to the original Right-To-Buy, M Thatcher was worried that her middle class residents would resent it when in favour of other middle class residents, but this simply did not happen:

    http://www.conservativehome.com/thetorydiary/2014/03/how-thatcher-sold-council-houses-and-created-a-new-generation-of-property-owners.html
    «Thatcher was worried that Conservative voters who had paid in full for their houses would be annoyed if council tenants were able to buy at a discount: “What will they say on my Wates estates?” she asked. But she was prevailed upon to swallow this objection.»
    «"The tenants will have the right to purchase their homes at a price one third below market value. [ ... ] a duty on every council to sell homes on these terms – giving their tenants what amounts to a 100 per cent mortgage with no deposit.”»

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  9. Hello,
    This is a very contemplative proposition. I just had a quick question; If this oversight was put in place, how would it perform in a well-reasoned, economically thought out way? Or what are some general ways in which a government would be able to calculate these sorts of things?

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  10. «If you want to help young people (like myself!) then introduce 100% land value taxation,»

    Well, you seem to belong to a small minority, because many millions of young (and early middle aged) voters are just waiting for the fabulous moment when they inherit a house in the South that doubles in price forever every ten years. Those millions of voters, who are waiting hard, all day, every day, for that moment in which they become landed gentry, and their aspiration to large tax free capital gains is realized, really don't want any taxes to punish all the effort and stress that they put in their hard waiting to become conservatory-building classes like their parents.

    If a young person's parents did not buy any property in South on 10-20 or 50 times leverage to leave their children a lifestyle as member of the landed gentry, ask them for what reason they wanted to punish those children. Responsible parents do as B Johnson said, and invest all their savings in buying property in the South to leave something valuable for their children :-).

    «so housing is affordable»

    Look at it from the point of view of the heirs of the conservatory-building-classes and their parents: housing in the South is actually free because the heirs inherit it, and it must be very cheap indeed because 2-3 millions of immigrants have been able to afford housing in the South, and are quite willing to pay modest rents of most of their low wages for bunk beds in basement rooms or garden sheds.

    Those voters think that the problem is the whining ninnies from the North who are used to live it large on welfare in houses with many spare bedrooms on benefits well above average.

    Also, an asset that doubles in price forever every 10 years is cheap at *any* price: just wait 10 years and you get back the money you paid. What could possibly go wrong? :-)

    Put another way, in a democracy the voters that can elect a parliamentary majority win, and the others lose. Currently the majority is based on the votes of the southern landed gentry and their heirs. You lose.

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    1. Yeah but property up north isn't really worth much.

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  11. I have spotted a few green shoots of fiscal understanding in this post's comments today, most encouraging from an MMT / Post Keynesian position. BEWARE, there are some neo-liberals politicians and New Keynesian (NK) academics, coming out with the "well that is just standard macro" defence. You might say there is some flip-flopping on the, not all yet bombed by the Yanks, "Road to Damascus", for the NKs.

    To get back to SWL's point, Thatcher style privatisation, has been a colossal rip-off for the 99%. If you do the numbers on say Cellular Telephone systems, it quickly becomes obvious that having multiple sets of expensive "base station" hardware, for multiple operators; wipes out the demand side competitive pricing gains.

    Now the latter is "standard macro". The more competition you have in a sector the lower the profits. Infinite competition means zero profits. Also, with the technology changing so fast, upgrading from 2G to 3G to 4G to 5G hardware, means the cost of that hardware has to be recouped, with profits, much faster. The customers pay for that, make no mistake.

    In the original electricity privatisation, (declare an interest at this point), at least we had the advantage of an extra "base station" having twenty to forty years between hardware upgrades and adding to system capacity on dark stormy nights. The downside was a totally artificial set of "market" equations had to be created to replace what was a natural monopoly equation. (But it was bloody clever having LOLP (loss of load probability), based on two colliding Bell Curves.) The CEGB used to make its generating stations compete internally on thermal performance in fuel groups.

    OK, the CEGB had more specialist engineers inventing things left right and centre; then giving them away to private sector companies to profit from. Exactly what you need them to do in a mixed economy !!!!! And yes, you could not move anywhere in the CEGB without falling over Apprentices and Technical Staff Trainees

    Anyway, having a laissez faire, neo-liberal, new Keynesian based Conservative government running the show, means the private sector will be commanded to make everything better, on their own, with no government involvement what-so-ever.

    Cameron says. Families will have the right to demand fast broadband in their homes. Legal right for fast broadband will be available for all people in Britain. Prime Minister pledged to put internet services on the same legal footing as water and electricity as a right, not a luxury. BUT, will do nothing to physically make it happen.

    You may have visited countries where fast, universal broadband was installed a few years back. All were led by "hands on" governments that led from the front. Conservative Party governments particularly, are ideologically incapable of leading from the front.

    The inability to spot the difference between a "system critical" natural monopoly good or service; and, one that is not and could benefit consumers with a bit of cost saving competition, is basically responsible for the decline of this once great nation.

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  12. Great post. Two points:

    [1] It would be good if this fiscal council looked the NPV of all spending and tax decisions, not just asset purchases/sales (like the CBO in the US). Things like the "triple lock" on pensions are very expensive in a NPV sense but not immediately.

    [2] A danger with the NPV approach on asset sales is that the fiscal council will assume that the value of the firm will be the same in both the public/private sector. This needn't be the case - you can argue that a lot of privatisations in the 1980s were simultaneously below their NPV but still beneficial for the government/economy as they improved the efficiency of certain industries a lot (this is a conjecture, but in the case of BT, BA, BGas etc I think you can make the case).

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