Privatisation is not good or bad in itself. Rather there are good and bad privatisations

Ideology can contribute nothing to debates about privatisation

The man who might be Labour’s next leader, Jeremy Corbyn, wants to reverse the privatisation of the railways and renationalise the energy companies. Meanwhile, George Osborne boasts that he is embarking on the biggest privatisation of public assets since the 1980s. The Student Loan Book, the Royal Bank of Scotland, the remainder of the Royal Mail, the Green Investment Bank. Everything must go! Some suspect the Chancellor even has secret plans to privatise the BBC and the National Health Service.

To privatise or not to privatise? It’s still one of the most contentious issues in politics; an ideological electric fence. Sadly, there’s more tribal emotion than economics in the debate.

One of the major fallacies – and one that the Chancellor himself has promoted in recent years – is the idea that selling public assets benefits the public finances. It’s generally a bad idea to compare the finances of a government to the finances of a household. But there are occasionally times when it’s instructive.

Imagine you owned a thriving little boutique shoe shop which brings in £500,000 in profits a year. You then sell that shop to one of the big high-street shoe shop chains for £2.5m. Does that transaction make you better off? Assuming the shop was sold at the market price, based on a standard multiple of expected future profits, the answer is no. You get the cash but lose the flow of annual profits.

Selling an asset for what it is worth does not make you better off. It merely swaps a productive asset in your portfolio for cash. It’s the same with cash-generating public assets such as the Royal Mail or the Student Loan Book.

Leave aside (for the purposes of this column) the possibility of ministers, for whatever reason, selling public assets too cheaply. Offloading a public asset for what it is worth does not improve government’s financial position.

True, it flatters one of the main benchmarks of the health of the public finances: the national debt. Accelerated asset sales over the coming years are the reason why the Office for Budget Responsibility sees the national debt falling at a slightly faster pace despite the Chancellor announcing more public borrowing in his latest Budget.

But the “Whole of Government Accounts” established by the Coalition – which takes into account the market value of public assets as well as the state’s financial liabilities – will show a different story. What you gain in cash, you lose in asset values. It’s a wash, as they say in financial circles.

Does that mean no government should ever privatise? Is it always a false economy? No. “Selling the family silver” is a brilliantly emotive image, but it’s a misleading analogy. When you sell the silverware you don’t get to use it any more. But we all continue to use privatised assets. The appropriate question is what is likely to deliver better value for the public? Will public assets be run more efficiently in the hands of the private sector, thus delivering more value to society as a whole? Will they attract more investment in private hands than they would be likely to get in public hands?

Those are a technical questions and should be informed by evidence. Much depends on the asset in question. Very few people – not even Jeremy Corbyn – would want to see restaurants in public hands (although the Government still owns the Inn the Park café in St James’ Park). And is difficult, given the traumatic history of British Leyland in the 1970s, to argue that car manufacturers would be run better from Whitehall.

Margaret Thatcher’s landmark privatisations of British Telecom, British Airways and British Steel have been broadly vindicated. The performance of all three businesses improved after they were sold, mainly because their managements were subject to competition from other similar firms in the sector.

But the benefits of privatisation will depend on the structure of the industry. Natural monopolies, where the post-privatisation competition effects are absent, often make for bad privatisations. The railways are a prime example.

Success can depend on the quality of the regulatory regime. Energy companies have run rings around Ofgem. The jury is still out on whether privatised water companies can be brought into line by Ofwat.

It will depend on the interaction with the rest of the market and whether the asset is required to correct a market failure. The Chancellor insists that offloading the state’s stake in Royal Bank of Scotland will help small firms to access lending. But the publicly owned Kreditanstalt für Wiederaufbau in Germany does a much better job of supplying small firms with finance than any private bank in the UK.

What effect would an emasculated BBC have on the wider ecosystem of domestic news broadcasting? The evidence from America – where Fox News trounces the Public Broadcasting Service – is not encouraging.

The National Health Service is the most neuralgic privatisation subject of all. The left responds to any extension of private provision as the thin end of a wholesale privatisation wedge. That’s a shame because continental Europe provides compelling evidence that a mixed system of private providers combined with a publicly administered insurance system (with adjustments made for individuals’ ability to pay) can deliver better outcomes.

Privatisation is not good or bad in itself. Rather there are good and bad privatisations. The industry matters, and so does the broader economic context. These are tricky questions, which require careful judgement and some humility from legislators. So beware those, from whichever side, who enter these debates with the glint of ideology in their eye.