I’m one of a group of more than 20 academic and business economists who have put together a statement criticising the Queensland government’s case for asset sales and arguing that we need a proper public debate. The group includes some of Australia’s leading economists, including Joshua Gans, Stephen King, Warwick McKibbin and Adrian Pagan, as well as ten professors of economics from UQ, and more from other Queensland universities. But maybe the most surprising, and heartening, signature is that of Henry Ergas who has been one of my sparring partners on many occasions, most recently a debate on whether government should be the ultimate risk manager, held by the UQ Alumni Association (Henry won, by popular vote). Although Henry has been a strong supporter of privatisation in many instances where I have opposed it, we agree that these issues should be decided on the basis of costs and benefits, and not by spurious claims that privatisation provides governments with money they can invest in schools and hospitals.
Update I just did an interview on Madonna King’s ABC Radio program, and have promised to debate the issue with Andrew Fraser. I will also probably do a TV interview.
Press Release & Statement (corrected)
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Press Release: Queensland Government Case For Asset Sales ‘Economically Unsound’; Informed Public Debate Needed
A group of prominent Australian academic and business economists has issued a statement describing the case presented by the Queensland government in support of its proposed asset sales as ‘economically unsound’ and ‘based on spurious claims’ The statement concludes that ‘The people of Queensland deserve a robust and well-informed public debate over the costs and benefits of privatisation. So far they have not received it.’
The group encompasses a broad range of views on the merits of privatisation —some might favour it in particular cases whilst others would be less likely to. However, all are agreed that such important decisions should be made on the basis of well-informed discussion. Important issues include whether the private or public sector would be the most efficient managers, which would be the best bearers of the business risk and the best ways for the enterprise to meet social as well as financial objectives.
The group includes twelve professors of economics from four leading Queensland universities and nationally prominent academic and business economists including current and former members of the Board of the Reserve Bank of Australia.
Statement by academic and business economists on the Queensland government’s case for asset sales
Decisions on the sale or retention of public assets have important implications for competition and public policy, as well as for the fiscal position of governments. These decisions cannot be resolved on the basis of general ideological arguments for or against public ownership, and require informed public debate in each case. The normal lines of economic debate include whether a given business is more efficiently operated in the private or public sector, the appropriate allocation of risk and the extent to which the enterprise is required to pursue social as well as financial objectives.
The signatories of this statement have a range of views on the appropriate balance between the public and private sectors and on the merits of privatisation in particular cases. However, we share the view that these questions should be resolved on the basis of well-informed discussion of the economic and social costs and benefits of privatisation, and not on the basis of spurious claims that asset sales represent a costless source of income to governments.
The arguments put forward by the Queensland government in its booklet ‘Facts and Myths on Asset Sales’ do nothing to promote a well-informed debate. Two central claims are particularly, and sadly, noteworthy. In relation to five public assets proposed for sale, the “Facts and Myths” booklet states
Keeping these businesses would cost the Government $12 billion over the next five years. That’s $12 billion spent on new coal trains and new wharves that can’t be spent on roads, schools or hospitals.
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.
Selling public assets will improve the public sector’s fiscal position only if the price realised for the assets exceeds the value of the income stream that the asset would otherwise generate for the public sector. In this respect, the ‘Facts and Myths’ booklet states
The total return from all five businesses in 2008-09 was approximately $320 million
When the sale process is completed, it is anticipated the Government will save $1.8 billion every year in interest payments.
This is an invalid, apples-and-oranges comparison. The $320 million figure consists solely of dividend payouts, excluding retained earnings, tax-equivalent payments 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 people of Queensland deserve a robust and well-informed public debate over the costs and benefits of privatisation. So far they have not received it.
Harry Campbell, Professor of Economics, University of Queensland
Tim Coelli, Adjunct Professor of Economics, University of Queensland
Henry Ergas, Economic Consultant, Canberra
John Foster, Professor of Economics, and former Head of School, University of Queensland
Paul Frijters, Professor of Economics, QUT
Joshua Gans, Professor of Economics, Melbourne Business School
Ross Guest.Professor of Economics, Griffith University,
Nicholas Gruen, CEO, Lateral Economics
Christopher Joye, Managing Director, Rismark International
Stephen King., Dean, Faculty of Business and Economics, Monash University, former Commissioner ACCC
Andrew McLennan, Australian Professorial Fellow in Economics, University of Queensland
Flavio Menezes, Professor and Head of School of Economics, University of Queensland
Christopher O’Donnell, Professor and Deputy Head of School of Economics, University of Queensland
Andrew Leigh, Professor of Economics, ANU
Adrian Pagan, Professor of Economics, QUT, former member RBA Board
Rohan Pitchford, Australian Professorial Fellow in Economics, University of Queensland
John Quiggin, Federation Fellow in Economics, University of Queensland
John Rolfe, Professor of Economics, Central Queensland University
Prasada Rao, Australian Professorial Fellow in Economics, University of Queensland
Rabee Tourky, Professor of Economics, University of Queensland
Warwick McKibbin, Professor of Economics, ANU, current member RBA Board
John Quiggin 