On bad arguments for Queensland asset sales, it’s over the fold
Category: Economic policy
A bit more on Queensland asset sales
Updated: Following some criticisms by the Queensland Treasurer, I’ve updated the estimates to exclude gains made by the Port of Brisbane on the sale of its shareholding in Brisbane Airport. Obviously, there are other adjustments that ought to be made to get a proper comparison between the interest savings from privatisation and the income foregone. Treasury has the resources to do this, but instead has chosen to present a totally invalid apples-and-oranges comparison between current year dividends and projected whole of government interest savings
I have a piece in today’s Fin criticising the Bligh government’s case for asset sales. I will probably post it here tomorrow. In the meantime I’ve picked up and confirmed a bit of additional information.
(i) Although the estimated sale price is $15 billion, about $7.5 billion will go to repaying debt held within the Government Business Enterprises themselves. That’s currently being covered out of the revenue of the GBEs, so this debt repayment will make no difference to the fiscal position of the government. The net return to general government is also about $7.5 billion, and it’s only this money that can be used to repay general government debt.[1]
(ii) The estimated interest saving from a AAA rating is $266 million over four years
(iii) The Port of Brisbane and QR[1] produced pretax profits of $553 million in the last reporting year. These state-owned enterprises don’t pay tax to the Commonwealth, but make tax-equivalent payments to the state so it’s pretax income that is relevant.
Port of Brisbane: Pretax 2009 $332 million [3]
QR: Pretax 2008 $221 million
This provides a simple basis for assessing the short-term fiscal impact of privatisation. The gain from privatisation, assuming the sale took place now, the estimated price is realised, the risk-adjusted interest rate is 6.5 per cent and sale costs are ignored would consist of
(a) interest savings from debt repayment, 6.5 per cent of $7.5 billion or $490 million
(b) savings from the AAA rating, $66 million per year
for a total of $551 million per year
So, the short-term effect of privatisation is roughly neutral. In the long term, it seems likely that returns would grow at least in line with inflation, while interest savings would remain fixed in nominal terms. Hence, privatisation would result in a long-term fiscal loss.
Perhaps there is a case for privatisation that would outweigh these fiscal losses, but, if so, the government hasn’t put it forward.
fn1. The alternative would be to do a whole-of-government comparison, taking account of all debt repayments and using Earnings Before Interest and Tax (EBIT) as the comparator.
fn2. Note that this calculation does not include Queensland Motorways or Forestry Queensland. These organisations roughly broke even in the most recent period, but they hold assets that can be expected to grow steadily (and, in the case of forests, literally) in value in future years.
fn3. This excludes a $275 million profit on the sale of shares in Brisbane Airport, but includes other valuation gains, which have been earned consistently in recent years.
Bligh’s bad arguments for privatisation
The Bligh’s government’s original case for the asset sales announced in the June budget was that the state’s finances had deteriorated drastically since the previous assessment at the time of the March election, as part of the generally declining outlook for the world economy. That argument has collapsed as the Australian and global economies have strengthened with the result that the Queensland state budget managed a surplus for 2008-09, as opposed to the projected $500 million deficit.
It would be possible to argue for some (though not all) of the proposed privatisations on the grounds of economic efficiency, but of course arguments of this kind are no more (and, given the epic failure of financial markets seen over the past two years) arguably less valid than they were before the crisis, at which time Labor rejected them.
That leaves the argument that the asset sales will improve the state’s finances. Such arguments depend on showing that the value derived from selling the assets exceeds the value realised by keeping them in public ownership. In this opinion piece, Bligh attempts to make such a case, but the arguments involve hopelessly invalid apples-and-oranges comparisons. When a policy is defended by such obviously shoddy arguments, the only reasonable inference is that the correct assessment comes out the wrong way.
Options after a double dissolution election
I’ve been thinking a bit about the possibility of a double dissolution. Given the complete incoherence of the Opposition, anything could happen, but it’s hard to see them agreeing on amendments that would be workable in any way. And equally it’s hard to imagine any outcome from a DD election other than a crushing victory for the government. Even so, a Senate majority looks out of reach.
That leaves them with two options after the election. They could use the joint sitting mechanism to pass the ETS bill rejected twice by the Senate. Alternatively (or subsequently), they could sign on to an agreement at Copenhagen and introduce new legislation implementing that agreement, relying on support from the Greens (or, in the event of a post-thrashing change of heart, the Opposition). The latter option looks a lot more appealing in many ways.
The worm in the bud
I finally read Gillian Tett’s Fools Gold
, an account of the development of the derivatives industry centered on credit default swaps (CDS) and collateralised deposit obligation (CDOs) that collapsed so spectacularly last year. The discussion is excellent, but still, I think, too charitable to these instruments and their creators. Tett’s main source is the group at JP Morgan who pioneered many of these derivatives and, largely, got out before the crash. Their line, unsurprisingly, is that the problem was not with the concept as they developed, but its abuse by latecomers.
But a close reading of Tett’s account yields a different story. These innovations were defective from day one.
Access Economics and CEDA on carbon taxes
I’ve seen a number of reports of statements by CEDA supporting a carbon tax as an alternative to emissions trading. This seemed surprising, since the two are basically equivalent. Given that the ETS is almost in place, suggesting such a variation seemed rather pointless.
But I’ve now received an email from CEDA which appears to explain everything. The real distinction is not between a tax and a trading scheme but between a tax levied at the point where carbon is used and one where final products are consumed. Since Australia exports a lot of embodied carbon, the tax on final consumption would raise a lot less revenue, and cause a much smaller economic shock.
In fact, modelling by Access Economics (PDF) suggests that the loss of income under a consumption-based carbon tax would be about half that from a production-based tax or ETS
So what’s the catch ?
The macro wars
Paul Krugman’s piece on “Why did economists get it so wrong” has attracted a vitriolic response from John Cochrane, reproduced here. Krugman’s piece was strongly worded, but the reply ups the ante, and I expect further escalation. Economics conferences in the next few years are going to be interesting events.
Given that, as Krugman himself notes, disagreements between economists were notably mild until the crisis erupted, what is going on here?
I’m visiting Berkely at present and just had a chat with Brad DeLong. These are some of the thoughts I had about the great macroeconomics wars as a result.
Various links
A few things where I’ve had a direct or indirect interest
* This study of media bias by econobloggers Andrew Leigh and Joshua Gans has unsurprisingly attracted interest from the media and econobloggers (Andrew gives some links). The striking (if not particularly surprising) finding is that the ABC as a whole is to the right of most newspapers. One aspect of it was how much the media cited public intellectuals identified as partisan by the fact that they were commonly mentioned in favorable terms in Parliament by one side, but not by the other. Interestingly, I didn’t pass this test. I had about 30 favorable mentions, of which about 30 per cent were from the Coalition.
* My Senate submission on deposit guarantees got a good run in this SMH piece, which opens with a look at the incidence of John Dillinger’s bankrobbing exploits, as described by Johnny Depp. Since been romantically linked with Angelina Jolie, I’m keen for more brushes with fame.
* Back when I was doing my Pure Maths degree, I studied fixed point theorems. One implication of the standard Brouwer fixed point theorem is the hairy ball theorem which implies, among other things, that there must always be a place on earth where the wind isn’t blowing. I said at the time that I aimed to get a research grant to test this theoretical result in practice, by travelling round the world and moving on whenever the wind blew. Today, my fellow-student and major source of technical advice for this blog, Martin Ellison, advises me that I’ve missed my chance. These guys have found the spot, in remotest Antarctica.
Gov 2.0
Gov 2.0* is an interesting exercise in trying to use new communications technology (Web 2.0) to promote the public good. Blogger and economist Nicholas Gruen is running the show (or playing a big role anyway) and is looking for tenders on a variety of issues. Take a look.
* To anticipate the standard joke, I’ll be waiting until the 2.1 release.
China, again
My piece in last Thursday’s Fin is over the fold
John Quiggin 