The Financial Costs of Privatisation

Abstract

Privatisation is often justified on the grounds that that the removal of SOEs from the public sector balance sheet circumvents the need for future capital injections and reduces future pressure on government expenditure and balances. In some cases, the revenues raised from the sale of SOEs have been used to lower the annual borrowing requirement. In the UK, for instance, the Thatcher governments used accounting conventions to deduct the proceeds of privatisation from the public sector borrowing requirement (PSBR).1 This essentially amounted to a sleight of hand in the accounting sense as privatisation proceeds were financing government expenditure and should therefore have been added to the PSBR. This sleight of hand was recognised by the EC, which disallowed privatisation receipts in the calculation of budget deficits under the Maastricht criteria. Nevertheless, privatisation receipts can be used to reduce government debt, which will indirectly reduce budget deficits via lower interest payments.