Smaller Government and Less Debt
A major aim of the think tanks and the Thatcher government was to reduce the role of government. Government control of industries and services such as electricity, gas, telecommunications and water was characterised as ‘government interference’. Where the government protected industries for strategic reasons, this was characterised as insulating those industries from competitive pressures and allowing them to become inefficient and unable to adapt to changing circumstances.
Also, the Conservative Party, through the influence of neoliberal think tanks, was opposed to maintaining government deficits and privatisation was an easy way to do this in the short-term without raising taxes.
Government debt reduction has been a major political rationale for privatisation. Government debt has been stigmatised as part of the propaganda campaign aimed at promoting government asset sell-offs. However there is nothing inherently wrong with debt. Debt is financially advantageous if income from assets is greater than the debt repayments. It also enables the costs of building capital infrastructure to be spread over the lifetime of the asset, which can cover several generations of taxpayers.
Traditionally, public infrastructure in affluent nations (other than the US) has been financed through government loans and bond issues. This was necessary in many nations because of the unwillingness of private companies to risk investing their money to develop public infrastructure unless they could be sure of making very high returns from it. The government debt incurred was justified on the assumption that the infrastructure would benefit future generations and that therefore it was only fair that they should also contribute to the cost. Economies of scale combined with technological advances ensured that services were reasonably priced despite the maintenance of reserve capacity.
However during the 1980s the idea of government loans being used to finance investment in public infrastructure was stigmatised by ideological interests who had an agenda of reducing the size and influence of government and shifting government assets into private hands. The Washington Consensus, first imposed on Latin American countries by the World Bank, and adopted voluntarily in English speaking nations, was a formula that included ‘fiscal discipline’ – that is reducing budget deficits and debt at all levels of government; privatising government businesses and assets; abolishing barriers to foreign investment; and deregulating sectors of the economy.
These were measures that benefited business interests at the expense of local communities. They were particularly beneficial to transnational companies looking for investment opportunities in public services around the world. The measures were promoted by corporate-funded think tanks in the US and the UK as well as Washington policy networks supported by large corporations and international financial interests. In Australia these ‘reforms’ were undertaken in the name of increased economic efficiency, productivity and industrial competitiveness.
However, as Professor Allan Fels noted in 2004, the “chorus of voices urging federal and state governments to rethink their aversion to debt is getting deafening… There are very few credible arguments against governments borrowing to build needed infrastructure”.
Similarly economic commentator Ross Gittins referred to the public’s economically illiterate notion that deficits and debts are bad and surpluses are good”. This, however, was a notion promoted by many business-friendly commentators in Australia and elsewhere.
The money raised from the sale of government enterprises is often presented as if it is all bonus revenue for a government. However governments do not gain in the long-term if the savings in interest repayments, together with the tax payments from the new private companies, are less than the combination of lost dividends and additional costs resulting from privatisation. The latter include the costs of market regulation, market failures, bankruptcies, government bailouts and abuses of power by the private companies.
Economist Richard Blandy confirmed in 2002 that “revenues earned by ETSA for the South Australian government before it was privatised would match, if not exceed, the interest on South Australian debt retired as a result of ETSA’s sale. Hence, South Australians now face historically high electricity prices compared with the rest of Australia for no net benefit to the state government finances.”
Similarly, Australian National University economist John Quiggan agreed that “privatisation of the South Australian electricity industry has reduced the net worth of the public sector… the interest savings on the sale price will fall consistently short of the earnings foregone through privatisation. This is consistent with most Australian experience of privatisation.”
Quiggan has also pointed out that the privatisation in Victoria resulted in no net gain for the Victorian government.
Privately-owned electric companies need to borrow money to buy government enterprises and build new facilities and so the electricity sector ends up with higher debts in many cases than when it was publicly owned. This private debt is more costly than government debt. Governments have access to low interest loans, available because of government guarantees.
The high government asset sale prices in Victoria represented large amounts of corporate debt. In the case of electricity this debt, which came at a higher price than government debt, was far more than the original government debt – a debt that the industry was not supposed to be able to support. Analysts predicted the cost savings available to the private sector would not be enough to make a profit and service the debt and therefore they would inevitably have to increase electricity prices or go out of business. Indeed, United Energy, one of the privatised companies, later admitted to the Sydney Morning Herald that it had been too optimistic in its estimates of the costs it could cut.
The profitability of NSW generators has been better than their privatised Victorian counterparts. This has been partly because of the greater debt load of the privatised generators, meaning that NSW generators could make profits from much lower wholesale electricity prices.
A study undertaken in 2003 found that the use of government debt was the funding mechanism most likely to raise Gross State Product (GSP) and to increase employment:
The case for the greater use of government debt is strong. Public infrastructure typically involves long lived assets and it seems rational that they should be financed over time. The evidence provided in this study is that this funding approach provided the macro-economic path with the highest gains from infrastructure investment. Billions of dollars of economic growth and many thousand of NSW jobs hinge on this.
Governments do not require the high returns on investment that private investors expect. For example, the return on equity in publicly owned electricity generators in Queensland is 7.1 percent on average, in NSW it is 10.6 percent. KPMG found that private investors would require a return of between 15 and 20 percent. This means that governments are willing to invest where private companies are not and don’t expect as much profit.
Contrary to common belief, government debt is not a determinant of a government’s credit rating. Rather, it is the ability of governments to meet their debt obligations that determines their credit ratings. Ratings agencies, such as Standard & Poor’s recognise that state governments have an obligation to fund infrastructure development and that this may be through debt. In deciding credit ratings S&P takes account of a wide number of criteria of which debt burden is only one. With respect to debt, S&P is interested in how that debt is managed, what it is used for, and how risky it is. Debt burdens are measured in terms of a government’s ability to support and pay it back: “Importantly, we view the debt burden in the context of an LRG’s [local or regional government’s] ability to maintain certain amounts of debt obligations.”