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A small win for economists

March 13th, 2010

Late last year I was among more than 20 economists who published a statement rejecting the case for privatisation put forward by the Queensland government in its ‘The Myths vs the Facts’ booklet. Among the claims to which we objected was one which read

MYTH: The five commercial businesses the Government plans to sell generate a lot of income for the State

FACT: The total return from all five businesses in 2008-09 was approximately $320 million. This is less than 0.9% of the Government’s income. For every $100 of Government income that’s less than 90 cents. When the sale process is completed, it is anticipated the Government will save $1.8 billion every year in interest payments.

The economists’ statement observed

This is an invalid, apples-and-oranges comparison. The $320 million figure consists solely of dividend payouts, excluding retained earnings, tax-equivalent payments[1] and the interest paid by the government business enterprises to service their debts.
The $1.8 billion represent the interests that would be saved, at a rate of about 6 per cent, if the state realised $15 billion from the asset sale and avoided $12 billion in new investment.  Most of this interest would be serviced out of the revenues of the GBEs, and can therefore not be compared with dividends derived from earnings after the payment of interest and tax.

The booklet is now on the web, and I’ve just noticed that the $1.8 billion claim has been dropped. If anyone would care to look through the archive, it would be interesting to see when this change was made.

The claim that’s been dropped was obviously bogus. But the error that is in many ways more pernicious remains

Myth: These businesses are cheap to run.
Fact: Keeping these businesses would cost the Government more than $10 billion over the next five years. That’s more than $10 billion spent on new coal trains and new wharves for the private sector that can’t be spent on roads, schools or hospitals.

As the economists statement observed

This claim is economically unsound. Forgoing income generating investments, and borrowing an equal amount to fund investments that return no additional revenue, leaves the government with no flow of income to service the associated debt. The necessary income must be raised by increasing taxes or cutting expenditure.

Moreover, having silently dropped their spurious claim about the benefits of privatisation, the government hasn’t issued a soundly based alternative. Apparently, the people of Queensland are supposed to accept on faith that this is going to be a good deal for them.

fn1. Subsequent Indirect advice from the government was that the $320 million included tax-equivalent payments.

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  1. BilB
    March 13th, 2010 at 13:58 | #1

    So what are you saying, JQ? In your considered opinion that the assets should be sold or should not be sold?

    I imagine that if assets have passed their status of strategic public need that promoted their creation originally then the case for a sale becomes simpler. However if we are talking about energy assets then there is a new criterion which revolves around future contractural flexibility, ie we cannot create future energy related contracts that cannot be altered as the future emissions abatement requirements evolve. The other issue from the public’s point of view is that if an asset leaves the conrtrol of the government then it has to be accepted that this asset could very well become unavailble to provide the service or goods that it was created to provide. This is because private industry carries no guarantees of sustainability or good business operation. It is absolutely false to assume that private industry is reliable, efficient, or enduring.

  2. Grim
    March 13th, 2010 at 15:45 | #2

    Before cheering too loudly, ProfQ, you should check the ‘null hypothesis’ that the claim was omitted by adminsitrative stuffup, and, now that you’ve pointed out its omission, will be restored forthwith.

    Remember, all government publications are fully covered by blanket E.&O.E.

  3. Louis Hissink
    March 14th, 2010 at 21:50 | #3

    But John,

    socialist economists are oxymorons.

  4. Jim Birch
    March 15th, 2010 at 11:54 | #4

    @BilB
    Did you read the linked statement? I think that if you read it, you’ll find that economists – not JQ specifically – were saying that significant public policy should be based on clearly fallacious arguments. It looks like one of the more obviously flaky arguments has been dropped. (That’s what he’s “saying”.) That might be some kind of a production error, but probably not.

  5. BilB
    March 15th, 2010 at 13:26 | #5

    Yes I did have a look at it, Jim, but it seemed to contain contradictory information (or “fallacious arguments”). Clearly there is something I don’t know. Hence the question.

  6. jquiggin
    March 15th, 2010 at 14:00 | #6

    @BilB
    I have different views on the different assets. As Jim Birch observes, it doesn’t help when the case in favor of sale is both spurious and lacking in the information required to form a clearer view.

    I’ll post more on this before too long.

  7. BilB
    March 15th, 2010 at 16:51 | #7

    Thanks, JQ. I am keen to learn more about this.

  8. 2 tanners
    March 16th, 2010 at 13:37 | #8

    Looks like the issue has caused quite a bite against Qld Labor in the polls. Sly and tricky seems to be the general opinion.

  9. gerard
    March 16th, 2010 at 13:46 | #9

    Is there anyone in the Labor party here? Do they have internal debates on this type of thing? Does the membership get any input into anything?

  10. Alice
    March 16th, 2010 at 20:02 | #10

    @gerard
    Short answer Gerard? No the labor party grass roots get no input. I have a friend (grass roots labor) who continually wonders why the party does exactlyu the opposite of what the grass roots labor members want. So do I.
    They want public services and less privatisation. They dont get it from Labor and they dont get it from liberal either. They just get more market madness from both parties.

    Time to vote for Bob if they are not happy – the most honest politician in politics.

  11. JJ
    March 17th, 2010 at 08:02 | #11

    @gerard
    Having first joined the ALP 20 years ago I can confirm that there aren’t too many members like like the asset sales proposed.

    Personally I can see some merit in some asset sales, but the justification that has been presented is appalling. It reflects either a fundamental lack of understanding by the government, or a complete disregard for the electorate. I am not sure which one is worse.

    One of my favourite silly arguments that they have made is about the success of privatisations like the Brisbane Airport Corp (BAC). Here is an entity which has doubled it’s throughput over the last 20 years and immensely jacked up it’s prices for everything. Parking is expensive and even cabs have to pay to go there. By comparison the Port of Brisbane over the same period has more than trippled it’s throughput and last year (under the direction of Treasury) was the first time they have increased their fees for 17years. So does BAC present a positive case study for privatisation? I guess it depends on what you are hoping to acheive. Apparently thius government is trying to achieve the highest possible number of annoyed voters in Queensland.

  12. JJ
    March 17th, 2010 at 08:09 | #12

    I was also got a laugh out of the Walker report which pretty much says that the reason for the credit downgrade was that Treasury stuffed up the presentation of the government’s superannuation assets.

    By all accounts noone in Treasury was questioned about it and the Treasurer rejects the notion that Treasury could have got it wrong.

  13. Alice
    March 17th, 2010 at 18:52 | #13

    @2 tanners
    2 tanners – the worst of it all is the swing has gone to the libs who are delivering much the same agenda of privatisations. People out there in the electoraten need to understand they cant swap “me” for “me too.” This is where they need to take a punt on a minor like green or independent who promises “no more of this privatisation garbage”.

    Thats the trouble…the tribal voter thinks there are only two teams and both teams play the same way and their switching sides doesnt bring them the change they want.

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