Monthly Archives: May 2015

The economics of the BBC


Imagine you smoke Rothman’s Royals (my old cigarette of choice) but, to do so legally, you have to pay a flat fee of over £100 a year that goes to fund the production of a government produced brand of cigarettes that you only occasionally smoke.

Or imagine that you shop in Sainsbury’s, but that it is a legal requirement that if you do so, you have to hand over upwards of £100 annually to pay for the operations of a government run supermarket which your may or may not use.

Both situations would be ridiculous; why can’t you just smoke the Royals or shop at Sainsbury’s? But this is the situation that exists in Britain with broadcasting. Everyone in the UK who watches or records TV programmes at the same as they are shown on TV has to pay £145.50 per year for the privilege of doing so with this licence fee going to fund the BBC. You have to pay this fee whether you watch the BBC or not.

Why does the UK have this funding system? Is the BBC a public good such that it should be supported by a tax on TV viewing?

A private good is something like a chocolate bar. You can share it, but if you eat it yourself then 1) the benefit of paying for it accrues to you alone and 2) the chocolate bar is not there for somebody else to eat. In the jargon, private goods are 1) excludable (payers can exclude non payers from enjoying the benefits of the good or service) and 2) rivalrous in consumption (if I eat the bar you can’t).

A public good, by contrast, is non excludable and non rivalrous in consumption. For an example, take Trident, another current public policy debate in the UK. Trident is non excludable; if half the people in Britain pay for it and the other half don’t, the half that don’t cannot be excluded from enjoying the protection it provides*. Trident is also non rivalrous in consumption; the amount by which it protects me is not diminished at all by the amount by which it protects you.

The BBC, or broadcasting more generally, certainly meets the non rivalry test for a public good. The amount of EastEnders you can watch isn’t diminished at all by any amount that I might watch.

But broadcasting fails totally as a public good on the non excludability criteria. If you haven’t signed up to Sky Sports, BT Sport, ESPN, Premier Sports etc and paid for them you cannot watch them. Payers, in other words, are fully able to exclude non payers from enjoying the service provided. Broadcasting is excludable.

There are other grounds on which government provision of good and services are defended. You can use a market failure argument in favour of some form of state healthcare, for example. But given the profusion of TV channels this doesn’t seem to be a problem for broadcasting. If you are concerned that the TV market might fail to produce to produce ‘quality’ content (however and whoever defines that), I would give you HBO and let you know that I spent two hours on Sunday morning watching a couple of old Sarah Vaughn concerts on Sky Arts.

Back in the old days of analogue signals, snow on the screen, wire aerials, and the national anthem at half past midnight, broadcasting might have been non excludable and anyone with a TV and a wire coat hanger could have picked up a broadcast of Queen Elizabeth’s coronation. But technology has moved on since then. New providers like Netflix have even ended the concept of a TV station. Technology has stopped the BBC being a public good and made the licence fee obsolete.

* Assuming it does, but that’s a different question. It’s a question that illustrates, however, that a public good, like Trident, might not be conducive to the public good. They are different concepts but as I had to explain this to someone recently, I thought it worth adding here.

A short history of British government fiscal (un)sustainability

When government finances are discussed you usually see two figures or charts trotted out. One is the government’s deficit, the amount of money it is borrowing, either as a nominal figure or as a share of national income. The other is the government’s debt, usually, again, either as a nominal figure or as a share of national income.

A government deficit may or may not be a bad thing, it depends on the circumstances. But as a figure itself it doesn’t give you the fullest picture of the sustainability of the government’s finances. If nominal GDP, national income, increases at a faster rate than the nominal debt, debt as a share of national income will fall even if there are deficits. So a chart like Chart 1, showing debt falling to the early 1970s, can coexist with a chart like Chart 2, showing government deficits in the same period.

Chart 1


Chart 2


The important thing for government fiscal sustainability, it seems to me, is the relative speed with which two magnitudes grow; nominal GDP and nominal government debt. If the percentage growth rate of nominal debt is higher than the percentage growth rate of nominal GDP, government debt will be increasing as a share of GDP and government finances are unsustainable.

Compare Chart 3 with Chart 2.

Chart 3 


This shows the percentage change of nominal GDP minus the percentage change of nominal debt. Where the figure is negative that shows that debt was increasing as a share of national income and that government finances were unsustainable. It corresponds rather well with the undulations in Chart 1. Better, I think, than in the commonly seen Chart 2.

What is striking is that British government finances have been on an unsustainable path since 2003 – five years before the financial crash. But it gets worse. Take a look at Chart 4.

Chart 4


The red bars indicate years of recession in the British economy, shrinking GDP. You can see that every period where government fiscal policy has become unsustainable has been preceded by a period of recession. Except one, the expansion under the last Labour government which began in 2003.

One of the hot political potatoes in Britain in the last few years has been the question of whether or not the last Labour government overspent. I think the above shows, quite unequivocally, that they did.