One of our objections to Corbynomics was the plan for renationalisations. We asserted in our letter that this consumed fiscal space. What was meant by that was that the cost of finance for governments, after a certain point, will depend on the amount they borrow, and there will in fact a limit beyond which borrowing lowers the price of the sovereign’s bonds to zero. Borrowing to fund nationalisation limits potential borrowing for other purposes, given this limited fiscal space.
Why? Surely if the government is borrowing to take ownership of a perfectly good revenue stream, in the form of a large company like a railway franchise, there is no problem? This was put to me by Jonathan Portes in email correspondence, and appears also in a footnote to Simon Wren Lewis’ response to the pro and anti-Corbyn letters.
The reasons are these. First-off, our signatories took the position that the state is more likely than not to damage these company operations through incompetence and failure to incentivise them. So the revenue stream is depleted in expected value terms by the purchase.
Second – and here I speak for myself only – these revenue streams are uncertain, and that uncertainty itself puts strain on government finances, for the same reason that household contents insurance ends up costing us money. It was pointed out to me privately that in order to measure this strain, we have to figure out how the revenue streams acquired covary with the other streams of inflows and outflows to the government coffers. My rough answer to this is that those covariances are unlikely to help, and will probably amplify, since one expects that these companies will correlate somewhat with overall tax revenues positively.
Third, aside from questions of efficiency, most states have a history of subsequently appropriating the organisations concerned for other purposes than revenue generation. [This is usually cited as a benefit by old-fashioned socialists like Corbyn]. Benign versions of these non-profit motives are usually that the firm is used as an instrument of progressive policy. (Benign, that is, if one thinks the existing set of transfers bring about an insufficiently progressive outcome, and can’t be done in a better way than nationalisation.) Less benign versions are that they are used as vehicles for patronage, industrial policy, or hidden social security. Either way, and almost definitionally, this appropriation costs money, and that depletes the government’s fiscal space.
Fourth, one has to raise the spectre that, however competent or innocent of ulterior motives the state might be, markets may not have the same high opinion of the likely outcome of nationalisation as the government itself, so fiscal space – read cost of borrowing – may be erroded by this pessimism alone. Presumably, ruling out an international bond market conspiracy [a big leap for many who seem to support the Corbyn camp], such space would re-emerge after a substantial period of good behaviour or good performance by the new state owners.
Of course, to believe that the concept of fiscal space has meaning, you have to be a member of the club that believes that even if you are a sovereign with an independent printing press at your disposal, you can’t simply run those presses to cover any fiscal difficulties you might have. At least not if you recognise that seigniorage generates inflation, and inflation is, beyond a certain point, something costly to be avoided. Corbynomists often deny this, and many times in supporting ‘People’s QE’ this view surfaces.
Looking at their mental processes regarding this policy, one can see it as a kind of fiscal ignorance leading to a bliss in which one can borrow to renationalise whatever you fancy, with no downside.