Burnham's Nationalization Plans Could Add Billions to Government Debt, Think Tank Warns

A proposal by Andy Burnham to increase public control over industries including housing, water, energy, and transport could add tens of billions of pounds to government debt, according to a briefing from the Institute of Fiscal Studies (IFS).

Burnham's initiative, dubbed 'Manchesterism,' aims to bring down costs for families by increasing public control. However, the exact implications remain unclear, with a taskforce exploring various options ranging from stricter regulation to full nationalization.

The IFS highlighted that reclaiming control of industries carries risks. Paying too little compensation could deter future investment, while overpaying might reduce incentives for other companies to adhere to regulations or manage their finances prudently.

The Office for National Statistics (ONS) determines whether organizations fall under government control and should be added to the public sector balance sheet. The IFS noted that the fiscal consequences of increased public control are not limited to formal ownership stakes but can also include less direct policy options like stronger regulation or government-backed loans.

In 2015, housing associations were temporarily placed on the balance sheet, a move later reversed. When an organization's assets and liabilities are included in public sector accounts, they affect calculations for the Treasury's fiscal rules. The government is committed to running a surplus in the third year of forecasts by the Office for Budget Responsibility (OBR) and ensuring debt falls as a proportion of GDP.

The IFS explained that the Public Sector Net Financial Liabilities (PSNFL) metric, adopted by Labour, may not fully account for nationalization impacts. PSNFL nets off financial assets but not physical ones. It also includes liabilities like deficits in funded company pension schemes. For instance, the water industry's assets are predominantly physical, and its liabilities, including pension deficits, could significantly impact PSNFL calculations.

The OBR estimated that moving the entire water industry into public ownership could add £91 billion in liabilities to PSNFL, with only £12 billion in financial assets as offset. The IFS also raised concerns about the ongoing running costs of entities deemed part of the public sector, which could require funding through borrowing, taxation, or spending cuts.

While the IFS suggested that one-off borrowing might have a limited impact on forward-looking fiscal rules, any nationalization or increased public control leading to reclassification into the public sector would mean the government inheriting the organization's ongoing profits or losses, thereby affecting performance against fiscal rules.