Image for Selling state assets is ideology rather than logic

Pic: State asset: Hydro’s Gordon dam

Privatisation: Broader issues

Privatising public assets is back on the agenda with Treasurer Hockey reigniting the discussion with his offer to State governments of a bonus if they sell remaining public assets and spend proceeds on new much needed infrastructure.

The Mercury ran an opinion piece on April 7th from one of its resident op ed writers ( Hodgman has to sell off assets ) urging Will Hodgman to sell assets and ditch the leftist, big government view of the world as a necessary precondition to reviving Tasmania.

The economic blogosphere is full of bloggers trying to come to grips with the causes of the GFC. At the heart of this discussion are the matters of money, debt, and the role of government and hence is of particular relevance to the issue of privatisation.

The spectre of crippling government debt is forever used as the ex-ante rationale for selling public assets and spending the proceeds on even worse performing assets.

The major supporter of privatisation is the funds management industry ... with a pool of funds growing faster than the economy chasing a return.

Hence speculating in existing assets is the name of the game. Public assets with regulated if not guaranteed returns are always a welcome addition.

But that is never the argument presented. Instead privatising public assets, as argued by Joe Hockey, is necessary to provide the necessary funds for more infrastructure.

This is where the political debate relies on conventional wisdom rather than sound arguments.

The post GFC analysis is increasingly casting doubt on accepted wisdom. Strange as it may seem to non-economists, much of what has been accepted as gospel truth on matters of money and debt is no longer tenable.

Which finally gets us to the point, why are governments constrained from creating money?

After all private banks do it remorselessly and it’s considered entrepreneurial.

What happens when the government spends money?

How does the government get funds into its RBA account?

Usually the government tries to keep between $10 billion and $20 billion in its RBA account, but what if there weren’t enough funds in the government’s RBA account?

The RBA could simply add the required funds to the government’s RBA account with the click of a mouse. Give the government an overdraft in other words.

The government does not need to issue debt or raise taxes before spending.

The corollary is that State government need not sell existing public assets to fund infrastructure. The Australian government could provide funds via the COAG process and an RBA overdraft.

An overdraft provided by the RBA to the government is an internal government loan. The sky would not fall in if it wasn’t repaid. Reductions may occur with subsequent tax receipts flowing into government coffers, or maybe from subsequent bond sales, but if there was still a balance so what? That’s been the US experience with quantitative easing (QE).

None of the above should be construed as implying governments can run large spending deficits without raising debt (or taxes for that matter) and remain oblivious to any consequences.

Rather currency issuing governments like the Australian government can do so when necessary.

This means funds for new infrastructure can be given by the Australian government to States without the latter selling existing assets.

Tasmania’s existing government businesses comprise one half of the total State government sector, so for the Mercury writer to idly assert that they should be sold to fund as yet unidentified new infrastructure without comparing the before and after cash flow effects on the State’s budget with a reduction of 50% in the size of the State sector, just to qualify for a $100 million bonus from Joe Hockey, is a policy position based on ideology rather than logic.

Ideology also clutters the road to economic salvation as long as there are refusals to take a revised look at the role of governments, debt and money. Commentators and politicians are yet to realise the full implications of the changing world over the past five years.

The road forward is easier than it looks if one is prepared to open one’s eyes.

Read the full article on John Lawrence’s Tasfintalk, here

Earlier on Tasmanian Times, Paul Gilding: Tasmania can capitalise on its renewable energy advantages