Economic Theory

Labour’s ‘free broadband’ would come at a heavy price


The Labour Party has set out plans “to deliver fast and free full-fibre broadband for all by bringing parts of BT into public ownership and creating a new British Broadband public service”. This is a bad idea.

There is no doubt that wider availability of better broadband would be a ‘good thing’. As well as being important for social inclusion and connectivity, improved digital infrastructure would bring substantial economic benefits in terms of increased consumer welfare and business productivity. Unfortunately, Labour’s plans are unlikely to deliver.

For a start, they assume that the government can do a better job than the market. Does anyone fondly remember how quick and easy it was to have a landline installed in the 1970s when the state-owned Post Office had a national monopoly? No, me neither.

Of course, the current system is not perfect, and the UK has fallen behind some of our peers. But the market in telecommunications has already delivered huge improvements in quality and value for money, particularly since privatisation, precisely because of increased competition and the profit motive.

Here many people hold on to the romantic view, popularised by the likes of Mariana Mazzucato, that the state was responsible for the technological revolution in the first place, and conclude that the state should take over the delivery of broadband too. However, this narrative confuses the invention of things, such as the World Wide Web or GPS, and the work done to turn these inventions into something practical for widespread use. It’s almost always the free market, driven by the dreaded profit motive, that has produced the commercial applications. That point applies just as well to related services, including the roll out of existing technologies.

In the case of broadband, there are doubtless ways in which the market could be made to work better, including tougher action to break BT’s quasi-monopoly of some networks via its Openreach subsidiary. But Labour would roll all this back and actually strengthen the dominance of a single player, and a state-controlled one at that. This is only likely to drive other providers out of the sector. And if we’re still tied to the EU’s rules on state ownership, procurement and competition, the European Commission might have something to say about this too. Labour’s plans may not be legal anyway, without Brexit.

If Labour’s policy were likely to work, the costs might be less important. But the costs matter too. Labour is wrong to claim that state broadband would be ‘free’, or, in the words of John McDonnell, “literally eliminate bills for millions of people across the UK”. Someone would still have to pay – whether as current or future taxpayers, or as customers receiving a worse service from a state monopoly, or both.

The financial costs are also large. The up-front capital cost of about £20 billion would come from Labour’s ‘Green Transformation Fund’, i.e. additional borrowing. The cost of bringing parts of BT into public ownership would be paid for by issuing new government bonds and swapping them for shares, i.e. additional borrowing too. All this is on top of the substantial costs of Labour’s existing plans to renationalise the other utilities, the water industry, and Royal Mail.

In principle, the increase in debt would be offset by the acquisition of a productive asset. But borrowing is still borrowing, whatever the purpose, and someone would still have to be willing to hold the new bonds. Potential investors are already worried by Labour’s broader economic agenda. Valuing assets is difficult, and any numbers are intrinsically less certain than the costs of the debt that finances them. There’s no guarantee that any new public sector assets would keep their value under public management.

As for the ongoing running costs, Labour says these will be “more than covered” by taxing “UK-based multinationals on the share of their global profits that reflects their UK share of their global sales, employment and assets”. This is presumably a nod towards the bureaucratic ‘formulary apportionment’ system being proposed by the OECD, which would be difficult to introduce unilaterally.

However, Labour’s press release actually names Amazon, Facebook and Google, which suggests that the real target would be US-based tech giants. Like the current government’s planned ‘Digital Services Tax’, this would be a de facto international tariff and therefore potentially in breach of WTO rules. Either way, the additional taxes are likely to be passed on to consumers in the form of higher prices.

Finally, it is worth at least asking whether it is sensible to promise free broadband ‘for all’. This amounts to a taxpayer-funded commitment to provide cutting-edge technology to people who might have chosen to live in some particularly remote location halfway up a mountain, regardless of their own ability to pay. Surely there are more efficient – and fairer – ways to use limited resources than this? Targeted subsidies to help deliver broadband to poorer rural communities might be one thing. Creating what is soon likely to become a nationwide state broadband monopoly would be quite another.

 



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