UK Government’s sale of shares in Royal Mail has raised close to £2bn for the public purse. That is almost enough to fund the Department for Culture, Media and Sport, including the national museums and galleries, for two years. The two years to have in mind are 2016-17 and 2017-18.
While the Coalition has announced spending reductions through to 2015-16 (and Labour has said that they will match them), there may be at least two more years of significant cuts to come. Even with growth returning, the Institute for Fiscal Studies predicts that the rate of cuts to departmental budgets in those years – 7.9% – will be higher than in the five years preceding them.
The end of the road for cuts?
Is it credible that a new government elected in 2015 will deliver more and greater cuts? The key is the return to growth. Higher growth than forecast may mean smaller cuts. But it is unlikely to remove the deficit on its own. However, once the mood of austerity has been broken with two years of growth from now until summer 2015, wages rising, interest rates low by historic standards, could politics still be defined by what to cut rather than how to spend?
Past evidence suggests not. Successive Conservative administrations after 1979 and then Labour ones after 1997 started by cutting back the deficit then, as economic conditions eased, they drifted back into the red. The spending announcements at the recent party conferences suggest that the same desire to share ‘the proceeds of growth’ has not gone away.
The welfare conundrum
If not more spending cuts in departments, then how else to close the gap? One option is to scale back commitments made on state pensions or to find deeper welfare cuts. The electoral logic of an ageing population makes the first close to impossible; and the problem with the second might be time: as the experience of Universal Credit shows, changes to the clunky welfare system are subject to major delays.
The tax trap
Tax rises are another possibility. But politicians are acutely sensitive to ‘cost of living’ concerns. Putting up taxes will risk the feeling that government is raiding at the first opportunity the hard-won gains for which people have waited a long time since the crash of 2008.
Valuing our assets
So we come back to the sale of assets such as Royal Mail. The IFS estimates that the gap for the public finances for the 2 years following the election is in the region of £25bn. Is there enough additional value to be found on the government’s balance sheet to fill the gap?
The problem is that we have no way of knowing this. There is no readily available national asset register. Certainly there is no information on rates of return for what government owns. There may be any number of assets that could deliver higher returns if they were actively managed or transferred to the private sector. But there is no way of finding out.
The Ministry of Defence alone has assets of around £150bn. Could those be scaled back by 10% without unacceptable consequences for defence objectives? That would fill three fifths of the £25bn gap. On the last whole of government accounts, the railways show an asset value of close to £48bn. Could an ambitious programme of sales close the rest of the gap?
Yet these questions form hardly any part of spending discussions in government. Future capital investment is scrutinised. But past investment is sunk.
This may be because there are some very serious complexities. We don’t for example know at this stage what the impact of the Royal Mail sale will be on key public spending or borrowing measures. The OBR, in its note last week on the September figures, said ominously:
The Government’s sale of shares in Royal Mail earlier this month will affect the public finances in a number of ways. The income from the sale will reduce the central government net cash requirement in a relatively straightforward manner, but the impact on public sector net borrowing and net debt is more complex and are subject to future ONS decisions.
The complexity derives from a number of issues, likely including what value the asset had while it was on the government’s balance sheet and what liabilities were associated with it.
Asset complexities
If an asset is sold for less than the book value, then this is no gain on the deeper measures of public spending. The large student loans book is likely to suffer from this problem, the private sector will almost certainly pay less for it than the value given to it by government, not least because government’s cost of capital is lower than that of the private sector.
Equally if an asset was paid for by debt, and its value has neither appreciated nor has the debt been paid off, then the positive impact of sale might be small or non-existent. Indeed, while Network Rail owns the railways and they have a large book value, Network Rail is also loaded with debt of somewhere close to £40bn.
Typically though the problem is that we do not know enough about the government’s balance sheet to judge these issues; and often neither does the government.
The Royal Mail illustrates a final challenge as well, that of social and political consent. It took a long time to win that consent in the case of the Royal Mail. We can date the start of the attempt back to 2008 at least, when the then Labour Government commissioned an independent review of postal services. And now consent has frayed due to the perception that government under-valued the shares offered to the market.
The task of securing consent has barely been attempted for other significant assets, such as land holdings, the road network or the railways. Can it be done in time to prevent further spending cuts in 2016-17 or 2017-18?
Selling off the family silver?
I haven’t mentioned the strongest objection of all. Because of course to some all of this will feel like ‘selling off the family silver to pay the bills’.
But this argument is flawed. A lot of the current spending at risk if further cuts are made after 2015 contributes to the future wealth of the nation. Whether that is spending on education or apprenticeships to build human capital, or grants for research and innovation to drive productivity improvements, it certainly isn’t the same as ‘paying the bills’ – in fact it is investment. And, to my mind, there is a fair question as to whether scaling back balance sheets and selling assets to which public administration might be adding little value is a better way to fund such investment than issuing more government debt or raising taxes.
There are complexities to figure through, plenty of them. But two years might be time enough to do that. Ultimately, the real question will be a political one. Working out a social market approach to it is our challenge.