There are some problems with this estimate of Labour’s nationalisation plans

Published: 17th Oct 2019

In brief

Claim

Labour’s plans to nationalise certain industries would cost at least £196billion and savers and pensioners could suffer further losses of £9 billion.

Conclusion

The analysis this is based on says either one or the other of these things happens, not both. Regardless its method is disputed and doesn’t factor in the potential economic benefits of nationalisation.

“Labour's nationalisation plans would cost at least £196bn, according to the Confederation of British Industry…

“It also said that under Labour's plans, savers and pensioners could suffer an estimated £9bn loss to their holdings, which translates into £327 for every household in the country.”

BBC News, 14 October 2019 

“The price tag for Labour’s renationalisation plans is beyond eye-watering – close to £200 billion. And that’s only the starting point. It doesn’t take into account the maintenance and development of the infrastructure, the trickle down hit to pension pots and savings accounts, or the impact on the country’s public finances.”

Confederation of British Industry, 14 October 2019

Earlier this week the Confederation of British Industry (CBI) released analysis costing the Labour party’s plans to nationalise various utilities.

It said the plans would cost at least £196 billion, and would cost pensioners and savers too. It did not try and weigh that up against any potential economic benefit of nationalisation.

This isn’t the first  effort to cost Labour’s nationalisation plans, and it can be hard to say definitively how accurate analyses like these are—all are trying to predict the future using models with various advantages and disadvantages. We will be writing more about this issue at a later date.

What we can say for certain though is that the reporting of CBI’s analysis (aided by CBI’s press release) is misleading.

It claims both that nationalisation will cost £196 billion and that  pensioners and savers will lose out, when in fact the CBI’s analysis says those two outcomes would occur under different (and contradictory) scenarios.

More broadly, some have argued    that what really matters isn’t the upfront ‘costs’, but whether nationalisation would deliver net costs or benefits to the public on an ongoing basis.

Problems with how the analysis was reported

The CBI’s analysis says that renationalisation will initially cost £196 billion. This assumes that Labour would pay the market capitalisation cost  s of each company. Market capitalisation is the amount you get if you multiply all the shares a company has “outstanding” (sold or given to other people) by the current share price.  

The CBI said that where market capitalisation was not available it used the regulated asset value of these businesses plus a 30% mark-up as a proxy.

It claims that: “This is based on evidence of historical takeovers which shows that utility companies have typically fetched a price above the asset value.”

The CBI also says that if a Labour government did not pay this mark-up, this would translate into a financial loss for shareholders who would not be paid the full value of their shares. These shareholders would include pensioners and savers who own stock either directly or indirectly (for example, via private pension funds).

That means it’s misleading to report, as many outlets did, both the £196 billion estimated cost to the state and the cost to shareholders, without specifying that under the CBI’s model they can’t happen simultaneously.

According to the CBI, either you have a £196 billion cost (where a Labour government pays a 30% mark-up to acquire companies) or you have a smaller upfront cost and a potential impact on pensioners and savers (where the mark-up isn’t paid).

While this was made clear in their methodological note, it is misleading of the CBI to say in its press release:

“The price tag for Labour’s renationalisation plans is beyond eye-watering – close to £200 billion. And that’s only the starting point. It doesn’t take into account the maintenance and development of the infrastructure, the trickle down hit to pension pots and savings accounts, or the impact on the country’s public finances.”

Problems with the analysis

Aside from the way the analysis was reported, CBI’s methodology has been disputed.

In particular, various economists have questioned the valuation of companies using a 30% mark up on the regulated asset values.

Also the CBI has since admitted it made an error by including the cost of buying the rail industry’s trains—which isn’t Labour party policy. The CBI said it was unable to provide an exact breakdown of its calculations, or how much it estimated the acquisition of trains to cost.  

But perhaps more important is that in looking just at the upfront ‘costs’ of nationalisation, the analysis may be focusing on the wrong thing.

Labour has not produced its own costing for its nationalisation plans, arguing that—as Shadow chancellor John McDonnell has previously said—“It would be cost-neutral because you would be bringing into public ownership an asset.”

Labour plans to issue government bonds   to pay for the companies so while public debt will increase, so will the value of public assets.

They’re not alone in arguing that this view of what nationalisation would ‘cost’ is not really the most important issue. As the Financial Times put it back in 2017: “For economists…the acquisition costs of nationalisation are not an interesting issue when governments are able to borrow freely.”

Rather, as the Institute for Fiscal Studies put it in the same year, “what matters is whether assets would be better managed by the public or the private sector.”

To be fair to the CBI, it does make clear that “the scope of this analysis focuses on the cost side of renationalisation and does not seek to estimate the potential benefits.” However it is limited by taking this approach.

For example, the CBI said that the government would need to service the debt created by nationalisation to the tune of over £2billion per year, without considering how this could be offset by any profit generated by these newly nationalised industries. Again, we don’t know enough to say whether a net profit or improved service—or both, or neither—is the likely outcome of taking companies into public ownership.

As we said above, we expect to write more on this issue in the future.

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