The House Article | How Burnham can do public ownership without scaring the bond markets

Burnham speaking to supporters after the Makerfield by-election (Associated Press/Alamy)

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In particular, his explicit diagnosis of privatisation (of essential utilities above all else) as one of the “four horsemen” of UK economic decline and his more ambiguous comments about how he would remedy it. So, what would a fiscally responsible approach to public ownership actually look like?

Before answering that question, it’s worth noting some fiscally relevant aspects of the set-up we already have. First, the UK’s infrastructure investment needs are immense, and will be funded by billpayers and taxpayers regardless of ownership status. Private ownership may keep spending off the government’s books in the short term, because consumers pay exclusively through their bills. But these high bills squeeze the spending power of those customers and restrict economic production, reducing taxable economic activity. The public purse is affected either way.

Secondly, Britain’s privatised utilities already depend heavily on public support (directly to companies or indirectly through their trading partners or households; explicitly or implicitly through bailout provisions). The £2.7bn cost of the 2021to 2022 energy “supplier of last resort” bailout programme is one example. Another is the nearly half of rail and bus operating expenditure funded by public subsidy. If the state is expected to absorb losses when things go wrong, there is a strong case for it sharing in the profits when things go right – socialising the upside, not just the risk. That is fairer, fiscally safer and creates better incentives.

Finally, public ownership is not inherently a threat to the government’s finances. Borrowing to buy or build productive assets that generate reliable revenues is not obviously riskier than relying on private owners to do the same.

The biggest potential savings come from the fact that governments can borrow more cheaply than private companies. This can have outsized benefits in highly capital-intensive industries like water or energy networks, and this is not speculative – existing policy already revolves around minimising this key parameter. A rough calculation suggests that bringing National Grid Electricity Transmission’s cost of capital much closer to the risk-free rate could lead to savings in the region of 20 per cent. Water is even more capital-intensive. Public ownership could close a large part of this gap, turning savings into lower bills, fiscal consolidation or greater investment than otherwise.

The bigger obstacle is not economics but the government’s fiscal rules. These dictate that “public sector net financial liabilities” (known as PSNFL) must be forecast to fall – something Burnham will likely keep to avoid any penalty from constant rule changes.

If the state is expected to absorb losses when things go wrong, there is a strong case for it sharing in the profits when things go right

Unlike the previous “public sector net debt” rule, this one allows debt to rise as long as it is offset by rising financial assets. However, publicly owned commercial enterprises like Transport for London and their assets are treated as non-financial assets in the accounts, and thus cannot be accounted for in terms of their net value for the purpose of the rules around borrowing to invest. A strategic approach is needed – carefully targeted and sequenced.

The priority should be finding parts of the system where public ownership can expand at low cost. The renationalisation of expiring train operating franchises and the National Energy System Operator are illustrative. The former acquired bargaining power against the real money pit in the rail system – the rolling stock leasing companies – by making the state the sole buyer of trains and carriages, while the latter’s control over co-ordinating the grid has untapped potential. Special administration or routine renewals of licensing, franchises and price controls also provide natural opportunities to minimise legal complication and fiscal expense.

Importantly, the debt rule permits bond-financed stakes up to the ownership threshold that separates public from private sector, and financing lending through bonds to any such private entity. This allows borrowing to acquire (minority) stakes in or lend to companies as long as they remain in the private sector.

The government should look at ways of using cheap public finance to build up ownership stakes over time, and at how payback periods for publicly acquiring shares can be accelerated through refinancing debts. Given the importance of sound commercial governance, these stakes should sit within a public corporation, not within Whitehall. Designated public financial institutions like the National Wealth Fund can be enlisted to support the process.

There is no one-size-fits-all approach, and the larger policy package in which it sits also matters. But clearly Britain’s current model of privatised essential services is not protecting the public finances. In many cases, it is actually jeopardising our fiscal sustainability. Any programme of public ownership will start from that fundamental reality. 

Chris Hayes is chief economist at Common Wealth think tank