Date created: 28 November 1996 Last modified: 18 November 1997 Maintained by: John Quiggin John Quiggin
Oct 3, 1994Privatisation has become an popular policy since 1980, particularly for governments facing difficulty in raising revenue. The British government alone has raised over £ 60 bn stg by this method. Privatisation is widely recommended as a method of restoring fiscal rectitude. On the other hand, critics of privatisation have condemned it as 'selling the family silver to pay the bills'. To complicate the picture further, a number of economists have argued that privatisation will have essentially no impact on the government's fiscal position.
There is surprisingly little evidence to support or refute any of these views. There has been no consistent attempt to estimate the impact of privatisation on the net fiscal position of the public sector, or even to consider how such an estimate might be made. Despite the vast amounts of money involved, privatisation programs have been adopted (and opposed) on the basis of faith rather than of evidence.
Privatisation automatically reduces the reported budget deficit in the short and medium term. However, this apparent benefit reflects the generally defective nature of the budget deficit as a measure of public saving. The budget deficit is a measure of cash flow and is confined to the 'budget sector'. Capital and current expenditures are lumped together and transactions between the budget sector (the general revenue and the activities funded out of the budget) and government business enterprises are treated in a completely arbitrary fashion. For example, government business enterprises are valued not for their earnings but for the (quite arbitrary) dividends they remit to the budget sector. This kind of criterion might make sense for elderly investors but not for governments or for that matter for private businesses. One of the few good things to come out of the ALP National Conference is a move to the adoption of separate capital and current accounts. If this was combined with budgeting on a whole-of-government basis, the illusory advantages of privatisation would disappear making possible a rational economic appraisal.
In an economic analysis, the appropriate comparison is between the flow of savings in public debt interest arising from privatisation, and the flow of earnings (including capital gains) that would have accrued in the absence of privatisation. Surprisingly, no such comparisons appear to have been undertaken on a systematic basis.
In a recent paper prepared for the Australia Institute, I made case studies of a number of actual and proposed privatisations. In each case, I found that the savings in public debt interest associated with privatisation were insufficient to offset the loss to the public sector of the earnings of the enterprise concerned. In some cases, the sale price is around 50 per cent of the present value of the stream of earnings foregone.
The worst implementations of privatisation were in Britain. Not only were assets drastically underpriced, but private firms were given monopoly privileges to make them more attractive to buyers. Competition was limited and prices often substantially raised.Thus, ordinary citizens lost out both as taxpayers and as consumers. Worse still, while privatisation actually reduced the net worth of the public sector, the illusory revenue bonanza it created led the Thatcher government to introduce massive and unsustainable tax cuts. The results may be seen in the budgetary crisis now facing Britain. With no more assets left to sell, the government faces a budget deficit of around 8 per cent of GDP.
As well as looking at actual privatisations, I examined some proposed privatisations that did not go ahead. In this case, it is possible to give an exact value for the stream of profits that would have been lost by privatisation and compare it to the estimated sale price. One of the most significant, but comparatively little discussed, features of the Fightback package was the proposal for privatisation of up to 600 Commonwealth GBEs with an estimated total sale price of $20 billion over four years. The savings in public debt interest associated with privatisation were the biggest single expenditure saving item proposed in the package. No allowance was made for the loss of dividend income to the Budget sector or, more generally, for the loss of GBE profits to the public sector as a whole.
Unfortunately, Fightback did not provide a detailed analysis of the assets proposed to be sold. However, the first year program (assumed to apply from 1992-93) included the sale of remaining shares in Qantas and the Commonwealth Bank, along with the AIDC, Snowy Mountains Engineering Corporation and Commonwealth Serum Laboratories, with estimated returns of $5 billion. The AOTC (now Telstra) was to be sold in three tranches, commencing in the second year of the program. The AOTC sale would have been by far the biggest single element of the privatisation program for these three years, which involved estimated returns of $15 billion. The total program would yield real savings in public debt interest of $1 billion/year assuming a 5 per cent real interest rate.
Consideration of Telstra alone indicates that this saving would be more than offset by the loss of GBE earnings. In 1993/94 Telstra returned post-tax profits of $1.7 billion, more than the savings in public debt interest from the entire program. In other words, the fiscal effect of the Fightback program would have been to give the other 599 enterprises away for no return to the public sector.
Of coruse, Fightback is dead and buried. But its underlying assumptions continue to dominate the policy debate on both sides of politics. As long as the present uncritical attitude to privatisation is maintained we can expect the continuing disposal of valuable public assets for inadequate returns. The long result will inevitably be higher taxes and reduced services.John Quiggin is Professor of Economics at James Cook University and author of Great Expectations: Microeconomic reform and Australia, published by Allen & Unwin.
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