The Royal Mail is a good reason to change the borrowing rules

Why do we insist that there is no difference between a profitable business that pays its own way, like the postal service, and one that depends mainly on taxation to fund it, like a school or a hospital?

Gordon Banks is a regular contributor to the Labour housing blog Red Brick

The treasury’s rule that includes the borrowing of public corporations as part of general government debt is unique. No-one else in Europe does it and the international organisations all regard public corporate borrowing as a self-financed trading activity.

The effect in the UK has been to squeeze out borrowing by public corporations that would be entirely justified by their business plans. One casualty has been council housing but attention is now being given to other sectors, like transport and the Royal Mail.

The campaign to change the borrowing rules to allow more council housing investment is a long one, but Labour and the trade unions should now be campaigning to change the rules to allow the Royal Mail to stay in public hands.

Nothing could better illustrate the stupidity of the rules than their use in justifying the need to sell a profitable business. Royal Mail has growing profits which could be used to service any borrowing it needs to invest in improved services, which of course is precisely why it’s an attractive proposition for private investors.

But why shouldn’t those profits also be available to the exchequer?

Instead, ministers want to sell off the golden goose (well, maybe not golden, but at least a convincing shade of silver). The unions are rightly up in arms – their members have made the sacrifices needed to modernise the service, only to see it flogged off. We, the taxpayers, have also taken on the burden of its pension fund to make it more profitable. Yet we are going to see a valuable business sold and – no doubt – pay higher charges in future so as to generate bigger profits for those who invest in it.

Yet how does the responsible minster, Michael Fallon, defend his position that he has no alternative? He claims that “every £1 it borrows is another £1 on the national debt”. He aslo asserts: “We can’t divert capital we need for schools and hospitals to Royal Mail – a very large business making substantial profits”.

There is of course absolutely no reason why Royal Mail should have to compete for public borrowing in order to invest – if it weren’t for treasury rules. Royal Mail is a public corporation which, in any other country, would be able to borrow outside general government borrowing constraints.

There are already rules in place to ensure that its borrowing is prudential and paid from its revenues. And in pushing it into the private sector we are creating yet another business that will be too important to be allowed to fail if its new owners make a hash of it.

As Fallon said, “It’s a great British brand with the Queen’s head on it”. Presumably then we would never allow it to go bust, so the taxpayer will continue to have a hidden liability.

It’s interesting that ministers have had to move onto the shakiest possible ground to justify the sale. After all, the argument used to be that the Royal Mail was a basket case that could only be dealt with by private enterprise. Well, surprise, surprise, it’s now doing pretty well in the public sector, so the justification is now that it’s competing for funds with schools and hospitals.

Let’s spell the argument out simply so that even the likes of Fallon can understand it. There are certain parts of the public sector which are classified as public corporations, not part of government, because they pay their own way. Bodies like Royal Mail, council housing, Manchester Airport and the tram companies are all in this sector. The rules that put them there are international ones, administered here by the Office for National Statistics.

In every other country, public corporations are also treated differently when it comes to assessing what counts as public borrowing. We have to follow these international rules in the forums that matter, like the IMF and the EU. However, in the UK itself we insist that there is no difference between a profitable business that pays its own way, like the postal service, and one that depends mainly on taxation to fund it, like a school or a hospital.

This is a nonsense which allows other countries who do make this sensible distinction to compete against us – as we have seen in the French and German government-owned firms who have taken over our public utilities. We need to stop the nonsense and bring our rules into line with everyone else’s.

There may be (though I personally doubt it) a respectable business case for privatising the Royal Mail. But if there is, let ministers make it, and don’t let them come out with spurious arguments based on treasury rules which (contrary to the impression they give) are far from being written in stone.

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