Rachel Reeves likes to say that she learned economics at her mother’s kitchen table, where she watched her ticking off the entries in the bank account to make sure that every penny had been accounted for, which is fine, but that is not the job of a Chancellor of the Exchequer.
And nor is it the job of a Chancellor of the Exchequer to run a government like a household, because a government can create its own money and a household can’t. They are fundamentally different.
But let’s just suppose for a moment that the government was run like a household. In a recent blog, economist Chris Dillow makes a really good point: that some of the decisions that Rachel Reeves and the Labour Party are making would never be made by a sensible household. She isn’t even keeping to her basic rule that she should run the economy as if it was a household.
The private finance initiative
Let me give two examples, both of them made by Chris. The first is the use of the private finance initiative to fund things like the proposed new Thames crossing. This £9 billion project is apparently going to be outsourced to the private sector so that the government doesn’t have to borrow the funds in question.
As Chris points out, this is an insane decision if you look at it from a household perspective. It’s rather like a household that looks at a mortgage deal, and sees that it’s a great deal for five years, but an appalling one for the next 50. But they take that option anyway, because their planning horizon is only five years, and they really don’t care about what happens over the rest of the period.
But this seems to be what Rachel Reeves is proposing for the new Thames crossing, which is to cost £9 billion, funded through a private finance scheme. It makes sense for five years, but not in the long term.
But real households aren’t like that. Actually, they usually do look at the whole pattern of payment that they are expected to make. And most of the time, they will not take a worse overall deal in return for a short upfront benefit. Instead, they’ll balance the whole equation. But she isn’t doing that. And as a consequence, she’s looks like a very bad household manager.
Nationalisation
This is also true with regard to another Labour policy – nationalisation.
The net cost of a government borrowing at present is about 1%. In other words, the government can borrow money for only a little over 1% above the rate of inflation in the economy. It moves slightly, but that’s the average. And if that’s the case at present, a company only needs to make more than a 1% return on investment for nationalisation to be good value.
Even the water companies have done that until very recently. The rail companies do, by and large, make a profit. And electricity companies make a much bigger profit than that.
So, the government could take these essential national utilities into state ownership at absolutely no real cost to the Exchequer at all. This is because the cost of borrowing to buy these companies at fair value would be less than the rate of return they could provide to the government through the payment of dividends resulting from their activities.
Buying them would therefore result in the government acquiring an asset generating a good return on investment. The return would more than cover the cost of the interest that the government would pay to buy out the shareholders of those businesses.
Why wouldn’t it, therefore, do that? Who knows? If a household could borrow to buy investments that would pay a return greater than the cost of interest on the loan, it would be mad not to do so. And that’s the position the government is in with regard to these industries.
Buying these companies would not only provide a financial return to the government. It would also create a public good: a benefit to everyone. And they might be better managed under state control. So why wouldn’t they do that? It is most certainly not running the government like a rational household would do.
Why is she doing this?
So, why is Rachel Reeves not following her own promise to run the government as if it is a household? She isn’t with regard to using PFI, which is a form of borrowing that would make no sense to any household. And she isn’t with regard to nationalisation, which would make sense to any household because they could make a return from it.
So, as Chris Dillow explains, Rachel Reeves is not running the UK government like she would run a good household. And that should worry us.
And, to be clear, I don’t believe in the household analogy. But if she’s going to use it, she should at least follow it. And she’s not doing that.
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