Axing £12bn from the welfare bill was a prime Tory election pledge – one that’s proving so impossible that even senior officials within the party’s ranks itself are now pressuring chancellor George Osborne to backtrack.
But Osborne’s zealous ideological commitment to austerity and rapid debt reduction, while absurdly ruling out tax rises and ring-fencing certain budgets, means that desperate moves now carry the day – with taxpayers footing the bill.
Last week has seen one of the government’s most frantic moves to date – rushing to sell off public assets including stakes in the Royal Mail and the Royal Bank of Scotland, the beneficiary of a £45bn taxpayer-funded bailout.
Osborne outlined his case for each respective fire sale in his Mansion House speech, arguing that it was the “right thing to do”.
“All the evidence suggests that commercial organisations are more efficient, more innovative and more effective when they are in the private sector,” he noted, while also adding the government would “use the money we raise in return to pay down the national debt.”
But each of these arguments – that privatisation improves a service and that selling off taxpayer assets effectively pays down the debt – are far from being rooted in reality.
The cost of privatisation
You don’t have to look dig too deep to see how privatising a service makes it less efficient and less effective, not more.
A CorporateWatch report from last year showed the price we’ve paid for privatisation – each household would have roughly saved £250 annually on rail, gas and water bills had each of these enterprises remained in public hands.
And it’s not just the inflation-busting price hikes that consumers must contend with. A Class report found that rail privatisation alone — whose subsidies have increased, not decreased as promised — has cost the taxpayer more than £10bn cumulatively.
This enormous cost, doubly paid for by the public in fares and subsidies lining the pockets of private corporations, has given us longer wait times and a less safe, much more fragmented service.
Even former chief executive Gerald Corbett of Railtrack, a failed enterprise following rail privatisation, admitted:
“There is a tension between shareholder interests and public service obligations…the only way we can make profits is by not doing the things we should do to make the railways better.”
Easy political points
But what about the idea that selling off publically owned enterprises helps pay down government debt and so reduce the deficit?
It might seem a straightforward notion on the surface – you sell off your possessions, and you’ll have extra money to pay off your debts – but, on a macroeconomic level, Oxford University professor Simon Wren-Lewis contends that this is the “worst” reason for privatising part of the public sector.
“While privatisation might reduce debt, it will also reduce future revenues or increase future public sector payments,” he noted. “Privatisation will either mean that the public sector loses the revenue that the privatised activity produced, or the private sector will have to be paid to undertake the outsourced activity.”
Wren-Lewis went on to argue that selling off assets to reduce debt is an easy political points scoring scheme.
“Privatisation is one of a number of devices that flatter the short term public finances with no impact (or worse) on the long term position,” he explained. “[This is] considerably worse if the asset is sold far too cheaply, as in [the initial Royal Mail sell-off]. Because fiscal rules inevitably focus on the next few years, politicians will always be tempted to use these devices to in effect cheat those rules.”
It’s a point also made by the Institute of Fiscal Studies, whose deputy director Carl Emmerson warned last week that quick public fire sales will do nothing to reduce the deficit in the long-term because it will only contribute a one-off windfall.
“We have a large deficit, and to reduce a deficit you need spending cuts or tax rises, so asset sales are not really helping,” Emmerson said.
If Osborne’s sell-off of RBS and its remaining stake in the Royal Mail can’t be justified by reducing debt in the long-term or giving the public better services, what justification is left?
Both public assets are will be sold at a loss. With RBS, the taxpayer will lose roughly £13bn from the sale, as Osborne proposed selling shares at £3.54 a share, down from the £5 a share the public paid in 2008 to bail out the bank.
A Guardian editorial noted the coincidence – the £13bn that taxpayers will lose is almost exactly the same as the figure that the Government hopes to slash from the welfare bill.
“As they say on American TV dramas: you do the math,” the Guardian noted. “This is almost a textbook case of taking money from the poor and handing it to the wealthy, who will be able to buy shares in a giant bank at a healthy discount in order to meet the artificial electoral timetable of a political party.”
The next round of the Royal Mail’s sell-off too has created a déjà vu scenario – 2013’s botched underselling has led to what looks like yet another. £750m in shares were sold on Thursday (June 11) to ‘institutional investors’ at 500p a share – well below last year’s peak share price of 604p, representing a potential £100m loss to the taxpayer.
To add insult to injury, average household investors, the very taxpayers who are being fleeced, have not been not offered shares, with only large investors such as pension schemes, banks, hedge funds or insurance funds being given the opportunity to buy.
As yet, the identities of these institutional investors now owning a public asset have not been confirmed.
This leaves us with the only motivation that Osborne and his government can have for their Great British Sell-Off – an ideological drive to redistribute money from ordinary working households to the City, a point made by Unite national officer for finance Rob MacGregor.
“Like Royal Mail and British Gas before it, the Tories are ripping off the public by selling our stake in RBS at a knock down rate to city investors,” he said.
“That Osborne is choosing to let the Treasury lose out on millions, while using the deficit to justify £12 billion in welfare cuts shows he is motivated by pure ideology.”