Privatisation and government debt

Simon-Wren Lewis at Mainly Macro is on target with the term ‘privatization’ as a way to ‘save’ money and add ‘efficiency’.  Of course no slogan making the claim can begin with ‘it depends…’:

Privatisation and government debt

Possibly the worst argument for privatizing part of the public sector is a supposed ‘need’ to reduce public sector debt. I think the problem with this argument is obvious to most economists, but as it is repeatedly ignored by politicians, it is worth spelling it out.

As I argued in a previous post, decisions to privatise or contract out should be based on considering the microeconomic pros and cons, which will vary from case to case. This analysis should include political economy considerations, like the extent of public sector corruption, or the ability of firms to extract rents from the public sector.

If we start out with public debt above its long run target, why not use privatisation to help get us towards that target? To see why that is nonsense, consider the two reasons for reducing debt given above. The first was to reduce the need to raise taxes to pay interest on that debt. While privatization might reduce debt, it will also reduce future revenues or increase future public sector payments. 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. So the net impact on taxes will be zero.

What about the point that public debt may crowd out private investment? Once again privatization does nothing to encourage private sector investment. All that happens is that existing capital and any investment that goes with it are relabelled private rather than public. No additional savings are released to encourage new private sector activity.

Commenter 6 June 2014 00:39  adds:

I like the example of Chicago parking meters. To reduce a budget deficit Chicago sold off the rights to collect parking fees to a private firm. So the benefit was all taken today and future taxes will need to be raised, so it was basically a bond sale. And not even a particularly good one.