Asset sales & deficit fetishism

The Times reports that the government is planning to sell off assets to reduce the deficit. There’s certainly stuff available to sell: the latest national assets register estimated that the government had £294.8bn of fixed assets in 2007. Such sales are, though, a bad way of reducing borrowing.
1. The sales are one-off, but the deficit is ongoing. They  do nothing to reduce the structural budget deficit.
2. When banks are loath to lend - the recent rise in their willingness to do so only partly reverses their earlier reluctance - and asset prices are depressed (the FTSE 100 is 25% off its peak), the government is unlikely to get a good price for the assets.
3. Asset sales could reduce future revenues - for example, the suggested sales of Ordnance Survey or the Dartford Crossing - or increase outgoings, if, say,  the government has to pay rent on offices it previously owned. They therefore cut the deficit today only at the expense of higher future deficits.
Let’s take an analogy. Say you have a big (and growing) mortgage. But you’re in a secure job, can easily afford the interest payments, and banks are happy to lend to you. Do you now sell your house, even though you’d get a poor price for it and you’d just have to spend the money saved on rent? Or do you instead curb your shopaholic ways?
Of course, there is a case for selling state assets if the private sector could manage them better. But this is a microeconomic issue of allocative efficiency, not a macroeconomic one.
Selling assets to cut borrowing is a form of deficit fetishism - the notion that we must cut the deficit anyhow, regardless of any other principles of public finance.

Comments

[The Great Simpleton]

There is another reason for selling - when large capital investments are needed. This was mostly the case for what we now call BT back in the 80's. They had been bled dry and needed a massive capital investment to replace the failing Strowger and crossbar exchanges with System x.

[Luis Enrique]

does your analogy have a section missing from it? why would you sell your house if you have a secure job and can easily cover the loan?

[Jim]

I'm intrigued that the UK govt has a total asset base of £337bn (from the asset register) and debts of circa £800bn and rising rapidly. If anyone was in that sort of position individually (debts nearly 3 times assets, and expenditure massively exceeding income) they wouldn't last long before the bailiffs were called in.

Am I entitled to spend the future income of my children now, and condemn them to a life of servitude paying off my debts? If not, why is the State allowed to do exactly that? Another case of 'Do as I say, not as I do'?

I wonder how many people would have to leave the UK before the govt attempted to prevent them doing so?

[Tom]

@Luis Enrique:

"why would you sell your house if you have a secure job and can easily cover the loan?"

I think that's the point Chris is making: you wouldn't do this so why should the government?

@Jim

"Am I entitled to spend the future income of my children now, and condemn them to a life of servitude paying off my debts?"

Well my parents' generation had to pay off debts incurred by the British government in defeating the Nazis, which I think was a worthwhile goal (YMMV).

The current government has got into debt to prevent a total collapse in the banking system, which they claim would have resulted in a lengthy recession that would impact on the income of future generations, so spending now can be seen as an investment.

So my kids' generation will be paying off debt incurred in ensuring their prosperity.

I wonder how many people would have to leave the UK before the govt attempted to prevent them doing so?

Fortunately it seems there are large amounts of people who want to get into the UK, so this is unlikely to be a problem:

http://www.statistics.gov.uk/cci/nugget.asp?id=1352

[Luis Enrique]

Tom,

Nothing in the post says the analogous householder is having any difficulty making ends meet - so why curb shopaholic ways? The analogy is missing something; spending beyond means.

[Matthew]

People go on about Gordon Brown's sale of gold, but much worse was surely Nigel Lawson's sale of BP shares in 1987. He pre-announced the sale (apparently the worst thing in the world) and got a price that's about 50% below the current price, plus the government didn't receive the dividends. I think by now he's lost the taxpayer at least $90bn, more than ten times Gordon Brown's gold sale.

[Jim]

@Tom:
If you think defending the nation from a Fascist psychopath is comparable to paying a significant proportion of the nation to sit on their arses, and employing armies of pointless bureaucrats, then I think you need to adjust your perspective a little.

Equally if you think the rising debt level is down to 'saving' the banks, you're sadly mistaken. Our esteemed PM (and former Chancellor) has managed to spend more than his income every year since 2002. Not a great deal of bank saving was going on then, and still the cash flowed like water.

The bank bailout is estimated to cost £200bn by the time its all over (but the cash cost is less than this so far). If Gordo hadn't already spent all our taxes, and a lot of the future's as well, we would be well placed to borrow that amount without too much pain.

As it is we face a deficit of £200bn this tax year alone, and £140 bn of that is structural deficit - will still be there when the economy returns to growth.

So it is highly likely that our children will face a poorer future, because we have grabbed their future earnings and spent them on ourselves now.

Just remember its your kids who choose the care home you end up in, and in this case will choose the level of your pension, and standard of nursing care too. They may not be too amused you spent their future on your today.

[Tom]

Here is the key part of Chris' analogy:

"you’re in a secure job, can easily afford the interest payments, and banks are happy to lend to you."

IANAE but if this analogy correctly reflects the position that the UK is in, then what exactly is the problem? So the government owes money, it always has and probably always will.

"then I think you need to adjust your perspective a little. "

My point was that every generation since the Napoleonic wars has had to live with the debt incurred either due to past wars or economic crises. WWI was a thoroughly pointless war but we still got into debt and successive generations still had to pay it back, and they did.

[Tom (not the same one as above)]

@Jim: we bequeath assets to our children as well as leaving debts. Roads, rail, schools, hospitals... these are all multi-generational assets (in 1997, half the NHS estate dated back 50 years). I don't think our childrens' generation can complain if they have to pay something towards assets that were built up before they were born.

[howardclark@btinternet.com]

Asset sales work if you understand the true value of something.

Unfortunately this government doesn't have a fantastic understanding of value. It normally finds this out some time later. A case in point might be the gold sale amongst others.

The government, any government, by using the right method could transform public services, increase quality and decrease costs.

The catch? They have to change how they think. Understand the problem thoroughly, from a systems perspective (not in a room with other bright people thinking what might be the problem).

[Jim]

@Tom:
1) "you’re in a secure job, can easily afford the interest payments, and banks are happy to lend to you." Where does the rising debt fit in to this analogy then? If you can afford the payments easily, why is your debt rising? And anyway the UK's income is not secure - tax revenue has fallen massively, and thanks to the collapse of the banks, may never get back to the previous levels.

A better analogy would be a household who was reliant on dicretionary income (bonuses, overtime etc) to make the mortgage and live the good life. Now reduced to basic pay, they can only just afford the mortgage and will struggle to keep the same lifestyle going.

2) "So the government owes money, it always has and probably always will." Not all govts owe money (China and Norway spring to mind). There is no rule of economics that says a State must borrow from the future to pay for its present consumption. We just like a higher standard of living than our efforts provide.

3) The point about assets and debts is simple - the assets are valued at £337 bn, the debt is £800bn and rising rapidly. So the future generations are in hock to the tune of £500bn+ even after counting the assets. If your parents did that to you - left you a house worth £300K and debts worth £800K what would your reaction be?

4) Multigenerational State debt is fine if the nation is united in one cause, such as winning a war. I doubt you'd get even a third of the population to vote for the current policy. We'll see next year anyway.

[Luis Enrique]

Sam Brittan writes on a similar theme, this week. He might calm your fears, Jim.

http://www.ft.com/cms/s/0/4679c2be-aed0-11de-96d7-00144feabdc0.html

Tom, the analogy could be doing two things. One, showing us there is "no problem" or two, showing us that the right way to respond to budget deficits is to adjust income/expenditure rather than turn to asset sales. I think the analogy is there to do the latter, but it is missing the budget deficit bit.

[Matthew]

"Unfortunately this government doesn't have a fantastic understanding of value. It normally finds this out some time later. A case in point might be the gold sale amongst others."

Howard this is obviously wrong if you think about it. There is a 24hr traded international market in gold, and so it is obviously one of the easiest to value. The BoE price received for the gold was indistinguishable from the market price.

[Sarah Danes]

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