Hearthly wrote:
An interesting read here, addressing the old 'How are you going to pay for it?' question that always get levelled at politicians, especially lefty types who like to spend money on nice things for people.
http://www.taxresearch.org.uk/Blog/2017 ... ay-for-it/Quote:
We’re not going to pay for it. We’re going to issue debt to pay for it. That’s because people like pension funds, the banking system and prudent savers are exceptionally keen to buy that debt. But more than that, government debt is just money. Read what it says on any bank note and you’ll realise that is true. And a growing economy needs more money and it’s the government’s job to create it. So we will. In that case who will pay? You could say it’s the people who are queuing up to save with the government who will pay. And we’re doing them a favour by letting them do just that.
After three years away, I went back to read El Murphs drivel and it is good to note that his normal standard of choosing the facts that he wants to reflect whilst ignoring all others is standing him in good stead.
He makes two fundamental points - that issuing debt at historically low interest rates to buy back shares in utilities is effectively free money, because the debt service cost is virtually nil and also, as the borrowing is matched with assets, there is no increase in the deficit.
1 - It may be cheap to borrow today, but no government ever repays its debt - it refinances it. So you can borrow today at 1% but when those bonds come up for redemption, the rate of interest on the replacement debt could be significantly higher. Therefore, arguing to load debt now is a short term view at best.
2 - If you do load up with debt, then your cost of further debt is likely to automatically increase as a result, thus reinforcing point 1.
I hate the "Economy as a household" analogy as it is nearly always bullshit, but in this case, I could theoretically go (today) and buy a house twice the price as my current house and keep my mortgage payment the same as I am currently on 4.5%, but will shortly drop to 2% (and that would apply on that theoretical mortgage too). But, when that subsequent fixed term ends, if mortgage rates have returned to normal, I'd be absolutely fucked on the remortgage, so this plan is a terrible idea.
Secondly - the idea that the debt is matched by an asset. Yes, kind of. However, the purpose of the buyback is to then impose a not for profit emphasis to the utility provider. But when you buy it, you're paying a price premium for all those lovely profits that the utility generates, that you will immediately strike out on day 1 and devalue your investment, so it absolutely would add to the deficit.
So the short, medium and long term analysis that there is no cost to the government of this proposal is incorrect. There may be very, very good reasons to do it, but because it is cost free is not a valid reason.