In their 2017 manifesto, the Labour Party says that it wishes to widen the government’s ownership of the economy and it talks about bringing utilities back into public ownership to deliver lower prices and more democratic accountability. The same is expected for the 2019 version. This is a substantive shift in economy policy and of deep concern to business, so it is vital that there is a healthy debate on how it would be done, and whether it would work.
As part of an ongoing campaign to bring clarity to Labour’s approach, this autumn the CBI published an analysis of the up-front costs of the Labour Party’s proposals to re-nationalise key British industries; from the railways and energy networks to water and Royal Mail. This brought two important issues to light.
The first was about the up-front cost. The CBI included the acquisition of rolling stock, for understandable reasons. Labour’s 2017 manifesto said it would repeal the Railways Act, part of which created the leasing companies that currently own the trains that run on our tracks. That policy position has not changed. Labour has – subsequent to the publication of our costings – now clarified they would only buy new trains as needed and would not look to acquire the existing stock but pay to lease them instead. Purchasing existing trains accounts for £13.9 billion of our estimate of £196 billion. That means the up-front cost would be a shade over £182 billion, bringing government debt to 93% of GDP.
But the second debate to emerge in response to our work is possibly even more important. As many commentators have rightly pointed out, the costs are only a small part of the debate. There are other economic arguments that need to be considered to fully understand the potential impact on the government’s finances and our wider economy.
As we pointed out at the time, the government would be acquiring an asset on their balance sheet as well as taking on more debt. In an ideal world, public finances would look not just at the overall stock of government liabilities (government debt) but also the net worth of the public sector. The Treasury are currently considering wider measures of the government balance sheet position to help inform the new fiscal rules that will be set out at the next Budget. But as issuing debt to pay for re-nationalisation would incur borrowing costs, an important question to ask, and one that is difficult to quantify, is how feasible it will be for the revenue the assets generate to cover the cost of purchasing them. This would largely depend on whether the assets would be managed better by the public or the private sector.
To think about this question, we first need to look at the evidence of what privatisation has achieved. Then we can analyse what could be improved, and the role business, regulators and government should play in delivering reliable, affordable train travel, energy networks, water systems and mail services.
While challenges clearly exist, the private sector has made huge progress in bringing investment and innovation to improve people’s experience. In energy, power cuts have fallen by a half since privatisation while carbon emissions have halved since 1990; investment in the water sector is double that of pre-privatisation levels resulting in a third less leaks since the 1990s; while there will be 7,000 more train carriages on the tracks by 2021.
The amount of future investment needed to maintain and improve these services is vital. The next five years will be critical to deliver more energy efficiency in our homes and businesses, to adapt our water system, and to decarbonise our transport networks, to become a net zero economy. It will take serious investment in our utilities and public infrastructure.
The National Infrastructure Commission estimates that we need £9bn more investment in the power sector each year on top of current levels and close to another £1bn each year in the water sector. This scale of investment needs to happen in partnership with the private sector, not by leaving them on the side-lines.
Is it likely that any government, when faced by understandable pressures to put more public money in our NHS or our schools, will instead opt to invest in upgrading water pipes?
Consider the wider impact on business investment. The cost of capital for the industries targeted for re-nationalisation has already increased as investors price-in the additional risk and uncertainty.
Investors are increasingly nervous and are questioning whether the UK is open to business. While Brexit has had an impact on our attractiveness for foreign direct investment (FDI), the UK remains the top destination for FDI in Europe. If we send the wrong signals now, we risk losing out on vital investment. And it’s vital our industrial strategy focuses on clean growth, tackling regional inequalities around the UK and improving the quality of life for everyone. This is where we need to see a partnership between government and business, and all government departments working together to achieve it. It’s too important to get distracted by an argument over ownership or a fundamental redesign of institutions.
Business recognises the status quo needs to improve. But the route forward is to work with business and help design a better system of regulation. We’ve set out several ideas for how things could be better, from making services work better for consumers to ensuring shareholders must not be paid at the expense of investment that would benefit consumers and local communities.
Business and Labour both want the same thing – to make services better. We agree the private sector doesn’t have a monopoly on good ideas. But it does have the investment, innovation and much else besides to offer. Let’s harness these to give customers the best of both worlds. And let’s have a transparent conversation so that voters can make informed decisions.