Labour have, historically, been portrayed as party of economic incompetence. The note left by Liam Byrne in 2010 clearly didn't help matters. But it wasn't just this. For some reason, the fact that they seem to care more about the workers than about big businesses has always led some people to think that they will be unable to run the economy.
The smartest thing that they have done in this election campaign is to have a fully costed manifesto. Every penny that will be spent is balanced with every penny that will come in. And yet, they are still being attacked on their economic competence.
Diane Abbott didn't help things when getting her numbers in a twist, but the man currently in charge of all of the government's money, chancellor of the exchequer Philip Hammond did a very similar thing and was not criticised in anywhere near as strong terms as Abbott was.
The Conservatives have still tried to attack Labour's numbers and their economic ability, despite there being very few numbers of their own in the Conservative manifesto. One of the few that is in there is the fact that they will get rid of free school dinners give each child 7p for breakfast every day, the equivalent of a few cornflakes without any milk. Literally snatching food away from them in the same way that Maggie Thatcher snatched kids milk back in the 1980s.
They have come up with a catchphrase of the "magic money tree," despite the fact that there is a nice neat little table explaining where all the money will be coming from without any mention of fauna. They are clearly leaning on the lingering perception that the public have no confidence in how Labour will handle the country's finances. They could criticise each of the measures but they have instead elected to just play on voter's emotions.
They then attack the missing spend on nationalising energy companies, train companies, royal mail. This is a bit of a misnomer. The Labour manifesto clearly budgets for all revenue income and expenditure. Any company would then budget for capital spend separately as you would not expect it to pay for itself at the time of purchase.
All of these nationalisation projects would be accounted for separately as they are investment projects. When a business is looking a similar project, such as an acquisition, they would be looking at the future income streams of the company they are intending to purchase and when that would be paid back.
They would use technical accounting concepts such as net present value (NPV) which works out using the cost of borrowing money and the expected future cash flows whether it is a worthwhile investment.
Where there is a difference in the cost of acquisition over the cost of the company's assets, this is put on the balance sheet as an intangible item known as goodwill. This would be things such as the customer base, reputation, staff qualifications or anything else that can't be quantified exactly. This goodwill would then be depreciated each year. This means that a portion of the additional cost of these intangible items will be charged against income each year. This is a basic concept of accounting known as the accruals concept which involves making sure that the money you make and the cost of making that money are matched off against each other.
So the reason why this isn't in Labour's costings is because it is outside of the annual spend that they have detailed. You could still try to claim that it is missing, however to include it would have given away how much they are willing to spend on the acquisition of these companies (as Theresa May has said with regards to the EU, she doesn't want to show her hand as it is a poor negotiating tactic) but also because it would have required a full set of calculations that would have probably only been understood by those with accounting experience. There are also large number of assumptions which would need to be made.
Let's look at an example. We will take Royal Mail as it is fully traded on the London Stock Exchange and easy to get data for.
I will simplify this rather than doing a full in depth accounting analysis in an attempt to make sure that all readers can understand this.
Their profit for the financial year to the end of March 2017 was £273m. As of today (5th June 2017), the market capitalisation of the Royal Mail is £4,391m. Market capitalisation is simply the number of shares multiplied by the current price per share. This gets you the value of the company. So if Labour wanted to buy the Royal Mail, they would need to spend £4.4 billion pounds in order to buy out all the current shareholders.
For the sake of argument, let's assume that Royal Mail will make a profit of £273m per year, adjusted for inflation, which the Bank of England suggests will be 2.8% next year. We will assume inflation stays at the same rate for the future. Therefore profits next year will be £273m x 102.8% = £281m. The year after, they would be £281m x 102.8% = £289m etc.
The government probably doesn't have £4.4 billion lying around to buy up the shares, so they would need to borrow the money. Again, for the sake of argument, let's assume that the government can borrow at the Bank of England base rate which currently stands at 0.25%. This is unlikely, but to be able to do any calculations, we will assume this is so. The government would then owe an additional 0.25% of the total outstanding loan value each year, which would be added onto the total borrowing. For ease of calculation, let's assume that the government borrows this all on the last day of 2017 and repayments start in 2018.
Let's assume that the government pays back £200m per year.
Under these assumptions, as can be seen in the table below, the loan would be entirely paid off by the end of 2040 and in addition to this, Royal Mail would be adding funds to the UK purse every year (as the profit each year is above the £200m repayments) which could then be spent on other things. After 2040, all Royal Mail profits would be able to be reinvested into other services as there would no longer be interest payments.
We can increase the rate of borrowing and see what happens. If we raise it to 2% but retain the same rate of payments (£200m per year) then we are still adding additional funds to the UK purse. The only difference is that the loan isn't fully paid off until the end of 2047.
So we can see that as long as we can keep the repayments less than the expected profit that any of these industries make, and as long as we can secure enough borrowing to acquire all the organisations that we wish to nationalise, then it could become both profitable to the country as well as the fact that we could control prices for consumers and also the quality of the product.
Obviously this will increase the national debt, however you have to spend money to make money. Many of us borrow money to buy mortgages on our house. Most companies have to borrow start up capital. It is no different to this. In fact it is better, because unlike a start up business which is likely to lose money in its first year, we know that Royal Mail, Southern Rail (£29.3m in 2015), British Gas (£553m in 2016) and the like are all profitable and will provide a return on their investment.
Increasing the national debt is not in itself a bad thing, as long as when you increase it you have a plan to pay it back. Nationalisation includes a built in plan to pay back this money and also to make a profit.
The Labour government see this as a long term investment, unlike the Conservative government who have a history of selling parts of our national infrastructure off to private investors for a short term income gain but losing the long term benefit of the income stream.
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