the times | Monday July 27 2020 1GM 41

CommentBusiness

Increased public sector spending puts an

even greater burden on the private sector

D

avid Simon has an idea

that might save the high

street. Simon Property

Group, the American

company of which he is

chairman and chief executive, is

trying to buy retailers that have

gone bust. So far this year, it has

bought Forever 21 out of bankruptcy

and has made bids for Brooks

Brothers, the men’s clothing chain,

and Lucky Brand, the denim maker.

It is working in partnership with

Authentic Brands Group, an

apparel-licensing business that owns

dozens of brands and the image

rights for celebrities and historic

figures such as Muhammad Ali and

Marilyn Monroe.

The strategy originates from a

$243 million deal to buy Aéropostale,

the teenage fashion chain, out of

bankruptcy in 2016. Mr Simon said

last summer that his company had

“made a ton of money” from that

deal and was looking to invest in

retail again. “We’re certainly as

good as the private equity guys when

it comes to retail investment,” he

said. “We’re only going to buy into

companies that we think have

brands and that have the volume

that is worth doing it.”

There is a clear logic to Simon’s

investments. The collapse of the

retailers would have left hundreds of

empty shops across the United

States, including in Simon’s shopping

centres. Not only would this mean

an immediate hit to rental income

(reflected in the fact that Simon was

a key creditor in bankruptcies of

Aéropostale and Forever 21), but also

the empty shop risks a ripple effect

that results in the value of shopping

centres falling. The landlord has to

accept a lower rent to find a

replacement tenant and then other

tenants demand more favourable

terms, too. In contrast, buying the

retailer stops the shop closing, gives

the landlord control of the empty

unit and provides the opportunity to

capitalise on a turnaround of the

newly rescued business.

It used to be said in retail that the

chains that owned their own stores

had more flexibility and long-term

security. However, a rush for

financial returns in the early

Noughties led to retailers selling off

property in a wave of sale-and-

leaseback deals. The dramatic

changes in the retail industry

brought about by the rise of online

shopping — which now accounts for

30 per cent of spending, according to

the latest Office for National

Statistics figures — provide an

opportunity for this concept to be

reversed.

In Britain, the relationship

between landlords and retailers has

never been worse. The Covid-19

pandemic has led to tenants refusing

to pay rents and private equity-

owned retailers pushing through

company voluntary arrangements or

pre-pack administrations that mean

long-term lease agreements are

ripped up. Research by Remit

Consulting shows commercial

property landlords in the UK,

including FTSE 100 companies and

pension funds, expect a shortfall of

about £3 billion in rental payments

for the first half of 2020 alone.

Some landlords have taken action.

Last week it emerged that dozens of

landlords of Travelodge hotels plan

to set up a rival operator called

Goodnight because they are

unhappy at being forced to take cuts

to their rents in a CVA. Like Simon,

they are working with a partner,

Village Hotels.

As yet, this is an isolated

occurrence in Britain. The leading

listed shopping centre owners —

British Land, Landsec and

Hammerson — do not have the

balance sheet to pursue deals as

aggressively as Simon Property

Group, which had $8.5 billion of

liquidity on its balance sheet at the

end of June. However, they could

seek to work with partners, while

other landlords, such as pension

funds and private equity firms, do

have the balance sheet.

At the very least, it is a strategy

that would help landlords to control

the destinies of their own shopping

centres, rather than watch them

drift into oblivion.

Mark Littlewood

Graham Ruddick

command higher remuneration and

enjoy much greater job security, are

being largely insulated from the real-

world effects of a downturn.

At the heart of decades of fiscal

indiscipline is the apparent inability

of politicians to fully accept the

existence of trade-offs. If those who

consume tax receipts are to receive

more, tax-producers need to

contribute more. A government that

believes a cashier at Tesco earns too

much and a High Court judge too

little can increase the financial

burden on the former to enhance the

salary of the latter. If they lack the

courage to do this directly, they can

shift at least some of the bill on to the

national debt. However, this simply

amounts to postponing the tax on

productive workers to a later date.

The danger we are sleepwalking

towards is a vicious cycle of fiscal

incontinence. An economic shock

leads to substantially enhanced public

spending. Through some means or

other, the financial cost needs to be

borne by the private sector, itself

reeling from the impact of the

downturn and less shielded from its

effects. This, in turn, stunts the

growth and diminishes the size of the

productive side of the economy. The

number of tax-producers goes down

and the number of tax-consumers

goes up, with the former having to

take on an ever-heavier burden. This

further inhibits economic growth and

the process repeats itself.

The UK’s unique constitutional

structure makes the adoption of

balanced budget protocols or legal

strictures on spending almost

impossible to achieve. This places a

greater day-to-day responsibility on

political leaders to understand and

embrace the need for fiscal prudence.

If “we are all in it together”, those on

the state payroll need to have their

remuneration pegged to the long-

term performance of tax revenues

generated by the private sector.

Today, the government will unveil

an anti-obesity plan to attempt to get

the nation to lose weight. It should be

unveiling a public sector anti-obesity

strategy to temper it

continually eating

far too much of our

diminishing

revenues.

It’s becoming ever

clearer that we are

exiting the

lockdown of the

economy in a two-

steps forward, one-step back fashion.

We can now visit socially distanced

pubs and restaurants, but a face mask

is now compulsory when shopping

and, unless you’re already there, you

are probably now cancelling your

planned holiday to Spain.

Whatever the merits of restricting

our actions from a public health

perspective, each such move digs a

deeper hole to scramble out of when

it comes to any economic rebound

and stabilising the state’s finances.

There is a very real chance that the

former will be so feeble and the latter

so disastrous that we should adopt a

new social contract between the

public sector and the taxpayers who

pay for it.

The lamentable state of the

government’s balance sheet has been

a matter of record for many years. As

time has worn on, it also has become

a matter of increasing indifference to

politicians of all stripes. No chancellor

has managed to run a budget surplus

for 20 years. The on-balance sheet

debt probably now exceeds 100 per

cent of national income. Long-term

state liabilities amount to about five

times that. Even the most hardened

of fiscal hawks tend to accept that

government finances will take a

battering at times of national crisis,

but we seem to have settled on a

position in which the state lives

modestly beyond its means in

the good times and greatly

beyond its means in the bad.

The situation is rendered

even more dire by ratchet effects

in government fiscal policy. A

standout example is the

triple lock on pensions,

which the Conservatives

promised to retain in

their election manifesto

last year. The

agreement is that the

state pension rises by

the rate of inflation,

wage growth or 2.5 per

cent, whichever of

these three numbers

is the highest. The

policy is therefore

certain to impoverish working

taxpayers to the benefit of pensioners

over the long run. If salaries and

prices are advancing only by about

2 per cent or 3 per cent a year, the

impact is, of course, relatively modest,

but when stress-tested in difficult

times, the triple lock is exposed as

egregiously unfair.

Imagine a scenario in which wages

fall by 20 per cent this year as prices

rise by 5 per cent. Let’s posit further

that the longed-for V-shaped

recovery does materialise and next

year pay packets rebound by 25 per

cent to return them to their nominal

pre-crisis levels, while inflation

remains low. The state pension will

rocket upwards by about a third,

while the working population will be

worse off as their static salaries fail to

keep pace with price rises. Their

disposable income may be hit further

by tax rises to try to prevent the

deficit spiralling wholly out of control.

The recently announced pay rise of

up to 3.1 per cent for nearly a million

public sector workers displays a

similar disconnect between the

treatment of those in the employ of

the state and the precarious position

of the 80 per cent of the workforce in

the private sector. Rishi Sunak has

said that the wage increase for

teachers, doctors, civils servants and

others is a reflection of the “vital

contribution to the country” they

have made. Many will have the

benefit of the salary increase being

backdated to April.

The truck drivers, shelf-stackers

and grocers who have performed

near-miracles in maintaining

supply chains and keeping the

country fed and watered must be

looking on in bewilderment. For

millions of non-state workers, a

pay rise is the last thing

they are realistically

aspiring to. Whether

they can keep their job

at all will be front of

mind as the furlough

scheme unwinds and

business closures and

huge job losses

inevitably follow.

Private sector

workers might reflect

too, that calls for a

continuing spirit of

national unity are hard

to take seriously if

those in the public

sector, who typically

“

’’

Mark Littlewood is director-general

of the Institute of Economic Affairs.

Twitter: @MarkJLittlewood

Graham Ruddick is Deputy Business

Editor of The Times

A strategy that can help

shopping centre landlords

stop slide into oblivion

Rishi Sunak has handed

a pay rise to some key

public sector workers

Offices

Industrial

Mixed

Retail

Leisure

Overall

Percentage of rent for June 2020

quarter collected on due date in UK

53%

43%

35.8%

35.5%

21.5%

37.8%

Source:

Remit

Consulting