Will Liberal Conspiracy and the Independent please learn the meaning of “Cost”?

It does no-one any favours when you report that “the official cost of the bailout is £850bn“.  Because the amount that the government stood to insure is not the cost.*  And the National Audit Office, upon whose report this is all based, makes it perfectly clear that:

the Treasury estimated that the final net cost to the taxpayer might lie within a range from £20 billion to £50 billion, depending on the length and depth of the economic recession and the strength of any recovery. The final net cost to the taxpayer will depend primarily on the scale of any losses arising from the Asset Protection Scheme, and on the prices at which the Government eventually disposes of its holdings in RBS and Lloyds Banking Group. However, following Lloyds Banking Group’s decision not to enter the scheme and changes to the terms under which RBS will participate, the estimated net cost is likely to be lower.

In fact, even this is a mis-statement.  The true ‘cost’ of supporting the banks to the taxpayer is the difference between:

  • what he/she would have had in incomes minuses taxes in the event of the banks being supported  and
  • what he/she would have had in incomes minus taxes in the event of the banks NOT being supported

The first item has a bill of maybe £50bn.  The second?  Well, try to add up this lot:

  • Potential deposit losses to taxpayers: god knows how many £billions
  • Potential equity losses to taxpayers: well, let’s put the FTSE down at 3000 instead of 5000.   Call that about £1 trillion to taxpayers
  • Lower GDP.  Let’s be kind and assume 2% more GDP wiped away permanently.  Taxpayers Wages alone are about 66% of GDP, or maybe £900bn.**   So £18bn less, discounted at 5%, is worth £360bn in NPV terms.

A cost of £50bn to avoid that lot?  Perhaps the government in October undertook the highest return investment of all time.

(none of this is to argue against the wonky injustice in how the benefits of bailouts have been distributed.  My calculations indicate that QE has given many times more to the top decile than the bottom decile.  Inevitably.  It is not fair, and policymakers should know about it.  But no-one should go around acting as if the bailouts cost us anything).

*unless you want to claim that, when you insure your house for £500k, you have just ‘cost’ your insurance company that amount.

**none of these calculations are checked in any way.  GDP is normally divided up in these proportions.  Household spending is £830bn and the savings ratio about 5%, so this can’t be far out: although some household income is investment, not wages.

Published by freethinkingeconomist

I'm former special adviser (Downing Street 2017-19, BIS from 2010-14), former FT leader writer and Lex Columnist, former financial dealer (?) at IG, student of economic history, PPE like the rest of them, etc, and formerly in my mid-40s. This blog has large gaps for obvious reasons. The name is dumb - the CentreForum think tank blog was called Freethink, I adapted that, we are stuck now.

2 thoughts on “Will Liberal Conspiracy and the Independent please learn the meaning of “Cost”?

  1. I think that the correct meaning of cost is such that the cost is £20-50bn. The benefits exceed that. But the cost is £20-50bn, otherwise the word cost loses all meaning. This is why we calculate benefit:cost ratios.

    It is however important to value the insurance at the premium – when the govt underwrote the channel tunnel rail link’s finances, on an insurance basis, it claimed that it did so at zero cost to the taxpayer, which was also clearly incorrect. You may not cost your insurer £500k when you insure, but they do have to reserve a couple of hundred quid.

  2. I am not sure that when you are trading financial assets, cost/benefit makes as much sense. In this case, the operations were probably: government sells gilts, goes long cash; uses cash to buy equity; now holds equity. The other operations are hard to even describe in such terms because they lack explicit transactions.

    On a marked-to-market basis, the govt is losing money on equity injections – that’s how we would describe the cost in the City, I think. But they have not really spent at all – not like buy new hospital spent.

    Sure, the cost ought not to include the benefit, except where the meaning is meant to be “by doing X you cost us Y”.

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