Do asset sales save the government money?

"We have found a further £4.5 billion of savings that we can make to the Government budget this year, including sensible asset sales."

George Osborne MP, Chancellor of the Exchequer, 4 June 2015

Good news, on the face of it. The Chancellor set out to find savings in the government budget, and duly located £4.5 billion worth.

That's not quite what's happened; some of these savings are actually the government selling assets.

What counts as saving money?

Normally, we'd talk about 'finding savings' in the sense of cutting spending. In this usage, selling assets would have no impact on saving.

Here, the Chancellor appears to be using 'savings' in the sense of the government cutting the deficit.

In the economic sense, saving is the bit that's left over from government income after spending on consumption. Selling assets doesn't affect this.

Selling assets can reduce the deficit in accounting terms, but it depends on which measure of the deficit you use, and which type of asset is being sold.

Asset sales can reduce the deficit, but they don't affect the overall position

The main measure of the budget deficit is Public Sector Net Borrowing (PSNB), which measures the government's need to borrow to fund its spending on investment and providing public services.

Selling financial assets—like government-held shares in RBS—has no effect on this measure of the deficit, while sales of capital assets—things like roads and buildings—do reduce the deficit on this measure.

When the government sells a financial asset, it has no effect on this calculation because it has no effect on government income or government spending.

Another way of looking at the same thing is to see that PSNB is equal to the change in the government's net wealth (debts minus financial assets).

Another measure of the deficit acts slightly differently. The Public Sector Net Cash Requirement (or PSNCR) records how much cash the government has to borrow to finance all of its spending, so financial asset sales will lower PSNCR.The sale of government holdings in Lloyds Banking Group illustrates the difference. When the government sells shares, PSNCR falls, but PSNB doesn't change at all.

Asset sales reduce the main measure of net debt

Selling the Lloyds shares does have an effect on the main measure of government debt, but this is essentially an accounting illusion.

Public Sector Net Debt, or PSND, measures the outstanding stock of government debt minus the government's 'liquid' assets. Liquid assets are things that can easily be sold for cash without losing their value.

Illiquid assets aren't set off against the debt in this way. Lloyds shares are no longer considered liquid assets, so when the government sells them it can make net debt look better by either funding spending (reducing borrowing) or paying off existing debt.

The problem is that there's been no "genuine reduction in government indebtedness" in this kind of situation. Selling an asset for what it's worth doesn't make you any better off. And if the asset is sold for less than its worth, then it actually reduces government net worth (total financial assets minus debts).

Governments have been doing this for a long time

Selling assets to lower the government's cash borrowing requirement isn't a new technique. Back in 1998, an author at the Institute for Fiscal Studies (IFS) complained that "governments have frequently used asset sales revenue to artificially reduce the reported budget deficit".

The problem with this practice is that the levels of income and spending that really drive the government's deficit haven't changed, and the government can only sell an asset once. Using asset sales to reduce the reported deficit in the short run will have no significant effect over the longer term.