ICAEW chart of the week: UK Government financial asset sales

The #ICAEWchartoftheweek is on the UK Government’s programme of financial asset sales, an important source of finance for the exchequer. These are expected to generate £16.4bn in 2019-20 and a further £25.5bn over the next four years as the government divests itself of assets acquired during the financial crisis in particular.

The £16bn to be raised in 2019-20 forms part of the overall £145bn funding that is needed to pay for a forecast £29bn shortfall in tax revenues, £99bn in debt repayments, and £17bn in net lending, including student and business loans.

Some £9.6bn of the proceeds in the current financial year are expected to be raised from the sale of the final tranche of Northern Rock and Bradford & Bingley mortgage and loan receivables. This should enable the government to finally close down the UK Asset Resolution ‘bad bank’ that was established during the financial crisis a decade ago.

Another legacy of the financial crisis is the government’s holding in Royal Bank of Scotland plc (RBS), rescued by the taxpayer at significant cost. £3.6bn is expected to be realised from the sale of shares this year, with a further £16.6bn expected to be recovered in future years as the remaining holding is divested. The exact amount to be raised will of course depend on the RBS share price at the time. Remember share prices can go down as well as up!

More controversial are plans to sell portions of the student loan portfolio. There are significant questions as to whether this makes financial sense given the significant losses that were recorded on the disposals made in 2018-19, and the losses expected to be recorded on future disposals.

Disposals of financial assets do not affect the fiscal deficit, but they do have the effect of reducing headline public sector net debt – helpful to the government’s objective of reducing debt as a share of GDP. Of course, whether this is right metric to be focusing on is a matter of debate.

There does seem to be a good logic for disposing of assets acquired as a by-product of bailing out the banking system at the height of the financial crisis that are not held for any strategic or policy purpose. However, the sale of student loans at a loss in order to improve a key performance indicator may not be the best financial decision ever made by the government.

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