Winner of the New Statesman SPERI Prize in Political Economy 2016

Tuesday 18 July 2023

Why nationalisation can be a gift to a future Conservative government


Polling suggests most voters think utilities should be publicly rather than privately owned, as here for example. (See also this YouGov poll.) You get similar answers if you ask about renationalisation (see this YouGov poll for example). 

Not only is renationalisation popular, but there are strong economic arguments that industries that are natural monopolies should be state owned. (Natural meaning it’s virtually impossible to introduce competition.) But this post is not about the relative merits of nationalised or privately run but publicly regulated utilities. Instead I will presume there are good arguments for renationalisation, but instead suggest a political economy reason why renationalisation is unlikely to happen.

It would be interesting to run these polls with a question that explicitly mentioned the 'cost' of renationalisation, to see if this influenced the results.  I suspect many Labour politicians think that while voters like the idea of a publicly owned water industry, for example, they would not like the headlines about the ‘cost’ of that renationalisation that would undoubtedly accompany it. In reality the capital cost of renationalisation is offset by the benefit of obtaining an asset (assuming a fair price is paid) but this is not how its usually portrayed. This post is about the corollary of thinking renationalisation involves a cost, which is that privatisation yields a one-off benefit.

Renationalisation may not happen, even though it is popular and makes economic sense, in a democracy where one of the two likely parties of government can be sure to reprivatise. I believe the UK is an example of this. In a recent post I argued that there were strong forces ensuring that the Conservative party would remain a pretty right wing party in economic terms, hoping to win power by appealing to social conservatives. Not only is reprivatisation ideological attractive to that party, but it also brings political advantages that the other main party (Labour) might not wish to give their opponents.

If the water industry, to take the most topical example, was renationalised by a Labour government that came into power next year, the Conservatives would want to reprivatise it whenever they regained power for a number of reasons. The most fundamental is that privatisation would fit with the party’s ideology and the wishes of their financial and newspaper backers. However privatisation is also attractive to a Conservative government for another reason. Because most voters do not see privatisation as a reduction in their wealth, they see the money privatisation generates for the government as a net benefit. It is seen as a benefit rather than a loss of wealth for exactly the same reason that many voters are scared about the ‘cost’ of the renationalisation, rather than seeing it as issuing debt to obtain an asset.

This is a problem of perception, which phrases like ‘selling the family silver’ to describe privatisation try to get over. Publicly owned companies (the silver) are a form of public (the family) wealth, and that means that the public (members of the family) hold that wealth indirectly through the government. The government, if you like, is the asset manager in charge of the family’s wealth.

The idea that privatisation produces a cash gain without an equivalent loss in assets may not just be about misperception, but may also be about redistribution. Suppose the water industry is privatised, and the proceeds are passed on to the public in the form of temporary income tax cuts. Those that most obviously lose out from this are people who pay little or no income tax, which implies those who pay substantial amounts of tax gain, even if they viewed the nationalised industry as part of their wealth. These financial gains will be increased still further if shares are sold to the public at a discount which they can subsequently cash in. In this case those receiving shares gain at the expense of those who would otherwise have got the proceeds from the sale.

All this means that privatisation represents a considerable resource for any government undertaking it, a resource which - to put it crudely - can be used to bribe whichever voter group the government wants to gain favour with. So in the UK a new Conservative government is unlikely to worry that the idea of privatisation was unpopular with many voters (as perhaps it was even in the 1980s), because the side benefits of selling the asset are popular, and the government can use those benefits strategically. Just as some voters in favour of public ownership may worry about what the media calls its cost, the same voters will enjoy what the same media will call the proceeds of privatisation.

It is in this sense that any renationalisation by an incoming Labour government will be a gift to the next Conservative government. Given the transition costs in changing ownership, together with uncertainty about how long it will be in office, this problem may be sufficient to deter a Labour government from renationalisation, however popular such a policy may appear to be.

Is there any way of dealing with this problem? The short answer is not much, but I think it’s worth exploring this in more detail. The problem essentially arises because voters fail to see nationalised industries as part of their wealth. Governments can always use fiscal policy to direct income to particular voter groups, but if that income comes through increasing the taxes of others, or cutting public spending, then the losers can easily be aware of what is going on. When a public company is privatised it is the lack of awareness of a loss in wealth that is at the heart of the problem.

We could all hope for a better media that stopped talking about the capital ‘cost’ of nationalisation, or instead talked about the ‘loss’ of assets involved in privatisation. But headlines like ‘£X billion cost bombshell’ are always going to be more attractive to the media than ‘£X billion asset transaction’, and headlines like ‘privatisation could mean 2p off income tax’ will always win against ‘privatisation: public loses with one hand what it gains with the other’. In other words education of the media has its limits, even if you ignore that much of it is owned by those pushing privatisation,

What a Labour government could do is increase transparency. This brings me to one of my specialist subjects: fiscal rules. I have for some time argued that governments should stop looking at the government debt to GDP ratio, and start looking at the public sector net worth to GDP ratio. Privatisation or nationalisation is a very good example of why. Privatisation that is used not to cut taxes but pay back public debt will reduce the debt to GDP ratio, but this asset swap does nothing to improve the public finances. I first wrote about this nearly ten years ago. The public sector has reduced debt but it has also lost an asset which produced an income stream. Debt to GDP gives the wrong message, whereas the right message is given by public sector net worth (which is largely unaffected by privatisation or nationalisation).

The battle to replace the ‘falling debt to GDP’ rule is not about economics. The intellectual case for looking at both sides of the balance sheet rather than just one side is overwhelming. In addition, judging by Labour’s fiscal rules, the Shadow Chancellor Rachel Reeves understands this. The problem is that the media still focuses on debt, and as a result Labour politicians of whatever flavour feel they have to respond to that. One thing Labour can certainly do in office is to talk much more about public sector net worth, and much less about public debt. Focusing on the latter rather than the former is not impartial (BBC please note), as the debt/GDP measure is biased against public investment and public ownership.

That is the long answer when the short answer is no. Undoing privatisation, perhaps like undoing Brexit, is something where the composition and goals of the Conservative party still matters even when they are in opposition. [1] For the foreseeable future the Conservatives are likely to reprivatise any industries that a Labour government nationalises, and get additional political capital as a result. This doesn’t mean that Labour shouldn’t nationalise at all, but the prospect of giving a gift to a future Conservative government is a much better argument against nationalisation than nonsense about prohibitive costs or nervous markets.

[1] Of course a Labour government can have an influence on a Conservative opposition. To take just one example, it could put a limit on how much any individual can give to any political party.  

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