PAC Fiddles While Public Money Burns

This week saw the publication of two reports that highlight the woeful set of priorities that govern the activities of the Public Accounts Committee and the media bandwagon that follows it. 

The first was the repeat of PAC's outrage over Google's international tax affairs. It seems we really are expected to believe that (1) these MPs are unaware of the rules governing where a company is 'permanently established' under OECD/UN Conventions and other tax treaties; (2) that the amount of additional tax that Google might have otherwise paid on about £3bn a year of revenue during 2006-2011 would have saved the UK economy; and (3) the UK does not benefit from the application of these rules to its own firms in other jurisdictions.

The second report came in the form of the lastest Bumper Book of Government Waste (itself hardly 'new'), which highlights yet again the £120bn that the public sector burnt last year for absolutely no benefit whatsoever.

With priorities like these, we should add PAC's own budget to the bonfire.

Government Is Right To Sublet Its Empty Offices

I was concerned to see Private Eye denouncing government plans to return empty government office space to the market, via sublets if necessary (Eye 1307, HP Sauce). That suggests a view that the government should simply keep paying the rent on its empty office space, creating a false property market, rather than reducing its rental exposure and using the savings to, say, reduce public borrowing.

The Eye says landlords are yet to agree to sublets, and quotes a letting consultant as warning that "throwing even cheaper subsidised office space into the market will only serve to make life even more difficult for existing landlords struggling to find tenants." Others apparently complain that "this latest wheeze will also threaten the viability of existing business incubator schemes, such as the Leeds Met University-backed QU2...". 

Poor old landlords! It's almost as if they're in the property business.

Like any other tenant, if the government did not try to sub-lease empty rental property, it would be missing the chance to mitigate its loss on the rental and distorting the property market. A free market should see rental prices for empty space falling to the point that someone takes the empty space.

I get the point that the government shouldn't subsidise private business tenants. So the rental on the sublets should cetainly be at commercial rates. But if that commercial sublet rental is lower than the headline rent due to poor market conditions, you can't really call the difference a subsidy to the sub-lessee. It's a loss (but not as big a loss as there would be if the government didn't bother to sublet at all). 

Furthermore, if subletting vacant space undercuts a university incubator scheme that is funded with public money, then the benefit of subletting is not only that it covers some of the Treasury's rental exposure, but also that it saves public money that would otherwise have been spent by the university. In turn, the university should get rid of its empty space. But even if the university scheme were privately funded, it should have to compete with cheaper commercial rents on sublets across town. That's a feature of a free market.

Of course landlords - and lettings agents - are going to be upset by the idea of sub-lets at lower rentals. But that's a feature of a falling rental market. Why wouldn't they try to resist such negotiations? So long as they're being paid the rent by one tenant, they may as well leave the building empty and try to rent other vacant space. That doesn't mean the government has to play along, and ultimately the landlords know that empty rented space amounts to false demand. Whether they persist in keeping the building empty in the hope that the market recovers by the end of the lease term is up to them. Again, it's a free market.

But the wider reality is that if landlords don't either accept lower rents or allow tenants to cover their rental obligations on empty space, then private tenants will be losing money and have to charge customers more - or face going out of business. For public sector tenants it would mean paying landlords instead of repaying government debt.

I know what I'd prefer. Let the landlords take the pain - it's their business.