The UK government says it is selling off the Royal Mail to allow it to borrow and invest in its future. Yet it would be cheaper for the Mail to take on loans if it weren't privatised - this shows us what the real motive is.
The Royal Mail has gone on sale. After much discussion of this potential privatisation, the auction has begun. This whole sorry saga tells us some interesting things about this government's attitude towards debt.
First, it is important to examine the particular reason given for this specific privatisation.
According to the BBC, “The government says the sale is necessary in order to give Royal Mail the access to private capital it needs to grow and remain competitive”.
Alex Massie in the Spectator goes into more detail. Alongside arguing basically that the Royal Mail should provide a worse service (which is a separate discussion from who should deliver that reduced service) he tells us that the Royal Mail should be privatised. Those of us who disagree with him have, he says, “emotion on their side but that’s about it”.
Why does he think that the private sector is a better locus for the body delivering letters and parcels? Well, he tells us, what is needed is “fresh injections of capital that allow it to diversify”. “The choice is between taxpayers funding the reforms and investment Royal Mail requires to compete and secure its future or allowing the market and private investment to do so.”
Now, this is an interesting statement. Let's assume – and I am willing to – that it is correct that the Royal Mail needs to raise money in order to invest in its future. Why would it be easier to get savers to invest in them if they are a private company than if they are a publicly owned company? Of course, being publicly owned means that you can't issue shares. But there are plenty of other ways - such as issuing bonds - to get cash in.
In fact, if we look more generally, it's almost always cheaper for the government to borrow than it is for private companies to do so. This is for a simple reason – governments are a safer home for your savings than private companies, who could go bust any moment. People are willing to take a lower return in exchange for this safety.
To give one example, the amount of money an investor gets/the government pays out on a ten year British government bond (known as the 'yield' on 'gilts') is 3.01% as I write this. This means that if the government wants to access cash to invest in something – capital - over a period of ten years, then it costs them 3.01% interest.
To take an already privatised company as our counter example, the yield on a BT share last year was 3.8%. In other words, it would be about a 5th more expensive for privatised BT to borrow money than it would have been for the government to borrow for them if they were still an arm of the state. And it's not just BT – it's almost always cheaper for the public sector to borrow.
So, why can't the Royal Mail just borrow through its parent, the government? Or why can't the government figure out a way for the Royal Mail to just issue bonds, like another company? By being allowed to invest in a government backed company, savers would have the ultimate safe haven for low risk investment and would be willing to take a very low return on each pound saved.
This, of course, is before we even look at the fact that a privatised Mail will have to have a profit skimmed from its activities every year. A publicly owned Mail could either invest this profit back in itself, or hand it over to the Chancellor. If the Mail is a good investment for the private sector, it is a better one for the State.
There are two reasons that the government won't just allow the Mail to raise capital as a publicly owned company, one technocratic, and one ideological. The technocratic point - which stops the Mail issuing its own shares (though isn't relevant to the idea of a direct Treasury share issue) is that, unlike other countries, when the UK adds up its public sector debt, it uses a system called Public Sector Net Debt (PDND). This includes the debt owed by all of the companies owned by the state as well as the Treasury itself. We have done so since the 1976 IMF crisis – at a time when public companies owed very much more debt than they do today.
Other countries use a system called General Government Gross Debt (GGGD) – which just includes Finance departments themselves, not companies owed by the state. In other countries, government owned companies have their own prudential borrowing requirements to stop them taking on more debt than they can pay off from the investments they make with the cash they take on loan.
This internationally odd and increasingly archaic policy means that when companies like the Royal Mail get people to invest in them so that they can improve and generate a bigger surplus, the government as a whole is seen as going deeper into debt, just as they would if they spent a load of cash on a core cost with no return, like invading Iraq. And politicians who have staked their career on not going deeper into debt don't like this. Of course, it would be normal to count this debt on Treasury books if that's where the bond issue came from. But if the government had a sensible attitude to investing in our country's future, that wouldn't matter.
What all this points to is the ideological reason that the Royal Mail isn't allowed to invest. And this, I think, is more important. In his piece, Alex Massie tells us that 'It is not so much a question of private good versus public bad (or vice versa)'. But the truth is that this is exactly what it is about.
The best way that you can tell this is in the language used. English, with its intermingling of roots, has more words than any other tongue. The art of spin doctoring is to understand that lots of these words have the same technical meaning but very different moral implications. So, 'debt' is one way of putting it. 'Raising capital' is another. 'Debt' is bad. 'Borrowing' is bad. 'Credit' is less bad. 'Securing investment' is good, 'raising capital' is great. And so on. You can learn a lot about someone's ideology from which of these words they use when.
When neo-liberals talk about the public sector, it is 'borrowing'. When they talk about the private sector – as Alex Massie says, it is 'raising capital'. It doesn't matter if it will be more expensive to pay off this loan once privatised, only one of these is OK. The spin doctors' taxonomy has spoken.
And what all of this reveals is another absurdity in the current government's rhetorical system of accounting. They are very good at giving the impression that all public sector activities spend wealth, whilst all private sector activities create it. This absurd logic means the following. Some of my wages go to my bank account. Some go to the Treasury in taxes. If I use the former to pay for a haircut, I have helped create wealth. If I use the latter to have my appendix removed, I have destroyed it. As a way to view economics, this is clearly absurd.
And this difference – between public sector 'debt' and private sector 'investment' governs far too much of our politics. As Stiglitz, among others, has often pointed out, public sector spending on things like education and infrastructure are a significant investment in the future economy, and the pay off is often much higher than the interest paid on cash borrowed to deliver these services. As the saying goes, if you think learning is expensive, try ignorance. But that's not how our government sees it. If it's a publicly owned company borrowing, it's 'debt'. If it's a privately owned company borrowing even if they pay higher interest rates – it's 'investment'.
The argument used to privatise the Royal Mail – that it will allow them to raise investment – is propped up only by an archaic way of laying out a spreadsheet and by a careful choice of words from clever spin doctors. The case against this is about much more than borrowing and debt. It's about democratic accountability, and the importance to the broader economy and society of services which may not be profitable to the individual company. But it's important to rebut the core argument made – that this is about investment – too.
Alex Massie says those of us who oppose this privatisation only have emotions on our side. But we also have interest rates on our side. And if he wants to make this an argument about borrowing, then that's the bottom line.
But, of course, this parable isn't really about borrowing or lending. The sale of the Royal Mail shows us, more clearly than ever, something we already knew. This government sees the public sector – the backbone of our civilisation – only as a drain on our economy. We must not accept this nonsense.
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