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Monday, 21 November 2011

The Taxpayer Cheated - Again

The sale of the 'good' successor of Northern Rock to Virgin Money is just the latest in a long series of cases where the institutional incomprehension of the Treasury has played strongly against Britain's national interest, to the disadvantage of taxpayers. A 'price' of some £750 million has been set on the sale, of which roughly one third will be plundered from the company's balance sheet; and a comparable additional sum has been supplied by an American business venturer. So for a net £300 million - or rather less - an asset that cost the taxpayer well over a billion pounds [and over a thousand people their jobs] Virgin have gained a profitable business that will repay the investment in a couple of years. Bully for Branson! The Treasury excuses this outrage by asserting that the European Union requires the sale, according the a set timetable.

Eurorats are arrogant, but they are not idiots: they know how unpopular their vampire squid is to the British public, and they would surely have been willing to accept the deferment of a date that is anyway months in the future; especially in the knowledge that if the UK had simply told them to 'sod off' there is very little effectual that they could have done about it. The blame for the sale must fall on the Chancellor of the Exchequer, in whose name the decision was announced, and on the civil servants who advised him. Blame does not attach to the bankers who advised the Treasury, as such consultants normally deliver the advice that the customer wants. The incident may lodge in the mass memory, alongside Gordon Brown's idiotic sale of gold reserves at the bottom of the market. But there are other aspects of the situation that can be used to illustrate a long running saga of misreporting.

There is no gain to the economy from this sale. The country has 'lost' more than half a billion poundsworth of 'value' from the national balance sheet, because around £500 million has gone from the 'value' of the banking sector and a further £250 million has been taken over by a foreign investor. The national accounts should be adjusted to show these facts: which amount to negative economic 'growth' of around £750,000,000.

I have been a connoisseur of this sort of misrepresentation for many years. When Dr Beeching was axing thousand of miles railway, nobody was interested in the extent to which the value of national assets was being diminished. All attention was focussed on the running-costs of infrastructure that was abysmally ill-managed. To my best knowledge, nobody but me was pointing out that to construct a mile of railway - even of rural branch line -  even then cost many millions of pounds. So the opportunity-cost of every mile closed should be deducted from that year's GNP  [Gross National Product] figures and from future estimates of the 'value' of the nation's assets. Any cash returned by UK-based buyers to British Rail or to the government from the sale of rails, sleepers or land was an internal trasfer: it was turnover within the year but it was not an addition of value. Any structure built on the site, or with the use of former railway materials, was a subsequent addition to the nation's assets: but in very, very few cases was the 'value' of replacement land use the same as its occupation by a railway. Similar considerations can be applied to dockyards, airfields and other assets that have been sold at knock-down prices, often after large expenditure by the government on site clearance. Although such assets require large expenditure on routine maintenance, and intermittent upgrading, they are of permanent value to the state; especially when they are constructed to support the national defence. Military technology changes, so assets to support the current shape of the forces must constantly be adapted, but the gaderene rush that has taken place since the second world war to dispose of assets that would be useful in the event of war long ago passed the point where the competence of the state to defend its people was devastated.

Industrial plant such as a steelworks can be kept running for a century or more, if it is properly upgraded; but it is eventually in a position where newer technologies make it comparatively uncompetitive. At that point it should be decommissioned; and its 'value' as a national asset should be written down over the years so that its net worth is recorded as zero even while it is producing output. Then the real and the notional loss to the national asset register can both be recorded as zero. Most industrial plant lasts much less time, and is written-off accordingly; and IT equipment and software is normally depreciated over a very short term. In most routine situations in business and in the public sector accountancy is effective in recording and reducing asset 'values' in a sensible and comprehensible manner. But strategic assets, such as the whole defence estate and infrastructure such as railways, roads, IT networks, power grids, reservoirs and flood defences stand outside the easily-accountable business arena; even if they are administered for the public by business corporates. The fact that they are enabled to exist only by legislation [or by legislatively authorised decree] and are regulated in their pricing and operations by criteria quite separate from those that are applied to 'normal' business shows that the state is fully aware of the distinction, of the public interests that are involved, and of the political sensitivity that can arise from mismanagement.

The Northern Rock incident is relevant to this whole discussion because the crisis of 2007-8 [and its long prehistory] shows that banks are quintessentially strategic assets, albeit they are in the main appropriately run as business entities. The whole world community, led by the G20, is busily setting new rules for the banking sector: and is unnecessarily drawing insurance into the same regulatory framework. But this has not yet tackled the issue that is exemplified by the sale of Northern Rock. What is the 'value' of a bank to the country in which is is domiciled? How is that 'value' calculated, reported and adjusted? It is a key part of the wider question as to how strategic assets are recorded and revalued in the computation of national assets and net national income. These are vital matters and I will revert to them in the coming days.

I will also return to the reason why I put a single inverted comma around the word 'value' in this [as in some other] postings to this blog. The issue is vitally important to any right understanding of the economy and it is a major underlying theme in my Personal Political Economy; see the link from this site.

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