Privatisation is the transfer of state-owned assets to the private sector. It was a major part of the UK’s economic policy in the 1980s and its impacts are still felt today. Proponents say that privatisation has improved efficiency and competition, while critics argue it has widened inequalities and reduced the quality of many essential services.
Why did the government implement privatisation?
In the late 1970s and early 1980s, the UK economy was amid a deep recession characterised by high unemployment, severe striking and double-digit inflation. In 1979 the national debt stood at 43.6% of GDP and in 1981 real GDP fell by 2.2%. As such, the incumbent prime minister, Margaret Thatcher, needed ways to boost economic growth and lower government debt. She wanted to sell off nationalised corporations to raise revenue and cut government expenditure. It was argued privatisation would improve efficiency and investment making UK firms more competitive and steer the country out of recession. The government was also driven by ideological beliefs[i]. They wanted to reduce state control of the economy and enhance private ownership, as well as reduce trade union power. The 1980s saw the sale of many nationally owned companies such as British Gas, British Rail and many others.
What were the benefits of privatisation to the UK?
Privatisation saw the end of state monopolies and opened more markets to competition. Private companies had the profit incentive to improve efficiency and lower their costs of production, making firms more price competitive, and allowing consumers to benefit from lower prices.
Competition also incentivises firms to improve efficiency to retain or expand their market share. Between Q3 1983 and Q3 1991 output per worker grew almost 11% in the UK. Better profitability, in turn, gives firms the means and motivation to expand their operations. This raises the derived demand for labour thus lowering unemployment. A positive multiplier effect[ii] may result in lower unemployment and increasing average incomes and consumption, so consumers have better material living standards. As a result, businesses make more profit which may see an increase in investment. The government receives a fiscal dividend[iii] with higher tax revenues from income and corporation tax and lower expenditure on welfare benefits. Thus, the government has more money to spend on public services such as healthcare and education or infrastructure projects, further boosting living standards and economic growth.
Private companies also have the means to pay higher wages than the public sector. For example, the ONS reported between August and October 2022 private sector wages grew by 6.9% on average whereas public sector wages grew by 2.7%. If more industries are privately run, average incomes will rise as fewer people depend on lacklustre public wages. Higher wages give workers more purchasing power allowing them to increase their consumption and improve their material living standards.
Furthermore, increased competition is shown to improve the quality of provided products and services. Private firms must ensure their products and services are of high quality to stay competitive and maximise profits. This may give consumers more choice further improving material living standards. For example, the privatisation of BT opened the telecoms sector to more competition. Subsequently, BT had to innovate to stay competitive. It now operates in over 170 countries and made around £21 billion in revenue in 2022. It now offers a much broader range of services including fibre broadband, mobile services, sports entertainment and many more.
Privatisation also improved government finances as billions worth of assets were sold. This combined with tight monetary policy[iv] and North Sea oil tax receipts helped reduce the budget deficit. In 1979 government debt stood at 43.6% of GDP. By 1990 this had fallen to 26.7% of GDP. Stable government finances help maintain confidence in the UK economy and give the government more elbow room in case of an emergency.
What were the failures of privatisation in the UK?
Private firms will always look to maximise profits. This can lead to mass layoffs causing unemployment. Unemployment can result in a negative multiplier, lowering average incomes, which may result in consumers lowering their consumption. Therefore, firms will likely scale back output, reducing the derived demand for labour and causing further unemployment. Less demand will lower confidence reducing the incentive of firms to invest in their company, as well as disincentivising potential foreign investors. The government budget deficit may worsen as tax revenue falls and expenditure on welfare benefits rises. Unemployment rose from 8.9% at the beginning of 1981 to 11.8% at the beginning of 1984 but this rise was relatively short-term.
Privatisation is not suited for all industries including sensitive infrastructure such as railways and water services. One major failure relates to British Rail. Since privatisation train fares have only risen despite most of the major rail services being heavily subsidised by the government. Government subsidies to maintain the rail services totalled around £17 billion in 2021. This suggests most of the private rail firms are deeply inefficient, and a major opportunity cost is incurred, where the £17 billion could have been spent more impactfully.
Besides this, many privatised companies were sold to foreign investors. Foreign ownership reduces control of critical infrastructure and limits the government’s ability to regulate them. Often foreign investors may leach profits away from the economy and may not invest their profit back into the UK. The mass sale of UK-based assets has also led to the appreciation of sterling, which has damaged the manufacturing sector by making exports more expensive and reducing international competitiveness. Selling assets to foreign investors can also cause geopolitical issues.
Pressure from shareholders to maximise profits can lead to underinvestment in many sectors. For example, Thames Water is owned by a consortium which includes Chinese and Arab investors who demand significant dividends. Total capital expenditure from the top 10 water and sewage companies had declined 15% since the 1990s while £72 billion in dividends were paid out to investors. Moreover, consumer water bills have risen by almost a third since 1991 and much of the UK’s water infrastructure is very old with some dating from Victorian times. Thus, consumers have been adversely affected by higher bills and yet lower quality of service.
Footnotes:
[i] Ideological beliefs - An ideology is a set of opinions or beliefs of a group or an individual, such as the ideology of a free market, command or mixed economy.
[ii] Positive multiplier effect - An initial injection (government spending, investment and/or exports) into an economy’s circular flow causes a larger than proportionate final increase in national income.
[iii] Fiscal dividend - The government receives a fiscal dividend when there is economic growth, leading to an increase in tax revenue and a decrease in spending on unemployment and poverty-related welfare benefits.
[iv] Tight monetary policy - Also known as contractionary monetary policy, is when interest rates are increased in an attempt to slow down an overheating economy.
Bibliography:
Returning the UK’s privatised services to the public | Financial Times (ft.com)
Privatising the UK’s nationalised industries in the 1980s | Centre For Public Impact (CPI)