The cost of nationalisation – CapX

To celebrate the 50th anniversary of the Centre for Policy Studies and the 10th of CapX, we’ve been republishing CPS pamphlets from our archive. This week, it’s the introduction to Daniel Mahoney’s 2018 paper ‘The Cost of Nationalisation’, where he exposed the staggering up-front costs of Jeremy Corbyn’s proposed campaign of renationalisation. You can read the paper in full here.

The Labour Party has put nationalisation at the heart of its economic strategy. It has promised to take some or all of the energy, water and rail sectors back into government ownership, as well as Royal Mail and an unknown number of Private Finance Initiative (PFI) contracts.

This is by no means the limit of Labour’s nationalisation plans. An official document entitled ‘Alternative Models of Ownership’, published after the 2017 general election, blames private property and corporate ownership for many of Britain’s economic ills. It mentions health and social care, infrastructure, telecommunications, the digital economy and data as areas that would function better outside of private ownership. The document also repeatedly refers to capturing the fruits of automation for public rather than private benefit, for example by requiring newly listed companies to give up a proportion of their stock to a sovereign wealth fund.

Despite its official imprimatur, and publication on the Labour Party website, the report claims that it should not be taken to represent party policy. But it does indicate that the party’s commitment to nationalisation is whole-hearted – and that the sectors mentioned in their 2017 manifesto may represent the start, rather than the limit, of its ambitions in that direction.

Given this, it is clearly in the public interest that Labour’s nationalisation plans receive close scrutiny, in terms of both their impact on the sectors concerned and the cost to the taxpayer. To date, John McDonnell, the Shadow Chancellor, has claimed that there is no need to cost these plans, arguing that the profitable nature of the assets will cover the cost of borrowing. But this is logically flawed. If Labour refuse to say how much their nationalisation plans will cost up front, then it will be impossible to calculate whether the borrowing costs will indeed be covered by the diverted profits. 

This, in turn, raises another key point. Labour has promised that it will use the promised savings from nationalisation to cut household bills by £220 – while refusing to spell out how this would be achieved, which particular bills would fall, when this would happen by, and how such a uniform reduction could be achieved for every household.

Yet at the same time, Labour has also argued that nationalisation will be cost-free, because the cash generated by these assets can be used to pay the debt costs.

The problem, self-evidently, is that if the profits are going to repay the borrowing costs, they cannot be used to drive down prices for consumers. And however the profits are deployed, there will be a heavy opportunity cost to the taxpayer, in terms of what the capital used could have accomplished if deployed elsewhere in the economy. Moreover, the yields on UK government bonds will inevitably increase due to the risks associated with Labour’s plans, meaning that government borrowing costs will go up even further. And, of course, the nationalised industries will in all likelihood become less efficient than they currently are.

The purpose of this paper, therefore, is to put a preliminary estimate on the upfront cost of the Labour nationalisation programme – that is, to calculate the immediate expense to the taxpayer. It does not argue that this would be the final cost of nationalisation: merely the down payment.

Given the lack of detail provided by the Labour Party, any attempt to calculate this upfront bill will be highly uncertain. But rigorous, independent evaluations of the cost of nationalisation have been undertaken in many of these sectors.

Taken together, they suggest that the upfront capital cost of Jeremy Corbyn’s nationalisation programme could be in the region of £176bn: £55.4bn for energy (this is based on a floor price for nationalising the transmission and distribution networks; nationalisation of the whole energy industry would come to around £185bn); £86.25bn for the water sector; £4.5bn for Royal Mail; and a potential £30bn for PFI nationalisation (although this estimate is particularly uncertain). It should be noted that, if Labour sought to nationalise the whole energy sector rather than just the networks, the overall cost of nationalisation would rise to £306bn.

Even taking the lower estimate of £176bn, this is an enormous amount of money: equivalent to 19.3 years of the UK’s defence equipment budget, or the cost of building 2.93 million council houses. The amount also represents 10.1 per cent of the national debt or £6,471 for every household.

And this, as mentioned above, only represents the upfront cost. Rail nationalisation, for example, could be accomplished ‘on the cheap’ if franchises were taken back by the state as they lapsed. But there would be ongoing costs in terms of new rolling stock and other investments; likewise in the energy and water sectors. That is without considering ancillary costs such as the accrued pension obligations of the various firms, or the impact on the Government’s debt repayments – particularly if bond yields rise due to a market reaction to these measures.

When confronted with estimates for components of its nationalisation programme, Labour has insisted that this does not represent the price that will actually be paid. Party spokesman have repeatedly suggested that it would seek to pay prices well below commercial values: the Shadow Chancellor, for example, told Andrew Marr that ‘it will be Parliament who sets the price on any of those nationalisations’. An alternative approach would be to use the power of government, or simply the pulpit it affords, to artificially drive down the value of the assets.

Yet overall, this would almost certainly be more expensive, given the impact on business investment and confidence, and the potential for capital flight. Also, many of the shareholders who would lose out are UK pension funds, meaning that taxpayers would be paying twice over. Similarly, Labour’s suggestion that it might pay ‘differential compensation’ rates for shares owned in countries deemed tax havens opens up the prospect of legal wrangling for years to come.

The puzzling thing here is that while there are substantial risks associated with nationalising utilities, there is little evidence – as this paper will make clear – to suggest that consumers have anything to gain. UK domestic electricity prices, for example, are roughly average for Europe. Consumers in Ireland and Germany – where there is a high degree of government ownership in the energy sector – pay higher prices than those in the UK.