By Harry Phibbs
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Often, free market Conservatives find it difficult to get enthused by George Osborne. Some spending and tax cuts here, some spending and tax increases there. A bit more red tape in some areas, a bit less in others. The deficit down, but the debt up. The Chancellor of the Exchequer seems to have been on a slow learning curve that when we are already so highly taxed, increasing tax rates does not necessarily mean increasing tax revenues.
When Conservatives talk about what the Government is achieving in reforms they talk about Iain Duncan Smith or Michael Gove or Eric Pickles. These are people who, to use Ronald Reagan's phrase are "not just marking time but making a difference." The Health Secretary, Jeremy Hunt, shows promise of being the new Gove – consciously applying the transparency of Ofsted-style inspections to hospitals combined with the threat of new management where there is failure. The Prime Minister can point to Libya, to offering an in/out EU referendum. But Mr Osborne is a disappointment.
The good news is that bank privatisation offers Mr Osborne a chance to redeem himself. It gives the chance to shift the nation once again towards a culture of capitalism for the many and not just the few. There is the prospect of millions of new shareholders between now and the next election.
Naturally there is political attraction in all this for the Conservatives. The Labour party has also spotted the politics and thus pleaded for delay – despite stressing how "temporary" it was when they took the banks over.
In fact bank privatisation, as soon as possible, would be good politics as well as good economics. As a recent Policy Exchange paper put it:
Our view is that the longer they are in state ownership the more damaging that ownership is for the banks. Even a Conservative Chancellor cannot help but discuss how he would like the bank to look in the future, however much the relationship is described as arm’s length. The RBS management team have made it clear that it is difficult to run the bank on commercial terms with the Government having such a large stake.
Sir Mervyn King said of RBS:
“The whole idea of a bank being 82 per cent-owned by the taxpayer, run at arms’ length from the Government, is nonsense.
“It cannot make any sense. I think it would be much better to accept that it should have been a temporary period of ownership only, to restructure the bank and put it back. The longer this has gone on the more difficult it has become to return RBS to the market.”
Ah yes. When Labour (effectively) nationalised Lloyds TSB and the RBS Group (which includes Nat West) they stressed how "temporary" it was. Years later they claim that privatization should be resisted on the grounds that it would be a "fire sale." Is "temporary" supposed to mean decades? Or like that "temporary measure" income tax, centuries?
The Conservative MP David Davis wrote (£) in The Times this morning about the damage that state ownership of the banks can do as a result of political meddling. He feels the "Government has questions to answer" over its handling of the abortive bid from the Co-Op bank for 632 Lloyds branches. Why not accept the NBNK Investments bid?
NBNK, which still awaits an explanation for why its bid failed, had offered £730 million, to be paid as soon as the ink was dry on the contract. The Co-op offered just £350 million upfront. However, the Co-op did promise some “add-ons” that, if the branches made big enough profits, could have been worth another £400 million over the next 15 years. In the long term, assuming the best-case scenario, the Co-op could have ended up buying the Lloyds branches for £750 million.
…why would Lloyds reject an upfront payment of £730 million in favour of a deal that guaranteed less than half that and would only have paid further amounts (if any) quite possibly as late as 2028? NBNK asked the same question.
Mr Davis adds:
Lloyds is spending £1.6 billion preparing to split off and sell the surplus branches. With no deal on the table, that money has been wasted. As the Government has a 39 per cent stake in the Lloyds Banking Group, this is a blow for the public finances and the taxpayer, too.
Why isn't Her Majesty's Opposition jumping up and down asking questions about all this, holding the executive to account? Firstly, as this sort of stuff-up just proves the case for privatisation. Secondly, the Labour Party is hardly going to pick a fight with the Co-Op. Jesse Norman recently offered some helpful advice to the Co-op in their financial difficulties: Stop handing over money to the Labour Party (around £6.5 million over the past decade.) Or at least be accountable and transparent with your members about what you are up to.
Sometimes it is argued that if we hang around a few more years then we might get a better price for the bank shares. But a broader view should look at the benefits of private ownership to the economy overall. If the banks are doing an effective job of lending money this will boost economic growth. If the banks are allowed to operate successfully with real commercial independence this will mean increased profits and increased tax revenue.
Apart from the argument about timing there is the argument about the method of sale. The narrow view is that the best deal is to sell to the highest bidder. The lesson from the Thatcher era is that wider ownership – including some free and discounted shares for staff – is of greater benefit in building an enterprise culture.
One of the more radical options comes from the Centre for Policy Studies. It proposes:
…an inclusive distribution, where the shares are given to all taxpayers. When the shares are then sold, a fixed amount – enough to recoup the original cost – would be paid back to the public purse, while any additional profit would be kept by individual taxpayers. This would put the returns back in the hands of the taxpayers who saved the banks.
Under this scheme "the sale of the state-owned banks will amount to one of the largest
privatisations in history, anywhere in the world." At the moment 20% of us are shareholders. That would increase to 100%.
In March the Conservative MP Nadhim Zahawi argued that giving the RBS shares to the taxpayer (about £800 each) would be just. They should do what they like with them – although there could be some phased transfer of extra shares for those who hold on to them. After all it was the taxpayer who paid for the bail out.
As I say, Mr Osborne still has a chance to establish his radical credentials…