Ryan Bourne is the Economic and Statistical Researcher at the Centre for Policy Studies.
In September 2009, Centre for Policy Studies chairman Maurice Saatchi made a speech to the London School of Economics, entitled “If banks make billions in profits, I’d like my share.” The message was simple and clear. Those who ran the risk of bailing out the banks should be those who benefit from their future performance. The banks were bailed out by the taxpayer.
Inspired by Saatchi’s words, Portman Capital has developed an innovative proposal, which seeks to allow the public to share in the future performance of the banks whilst recouping the full initial government investment. This, as reported today in a Centre for Policy Studies Pointmaker, entails distributing the shares of RBS and Lloyds to every taxpayer free (on a non-transferable basis), with a fixed amount returning to the government after every sale. Over time the policy allows the government to re-coup its £66 billion investment with any capital gain accruing to the individual taxpayer.
The usual response to this idea is: why not just a conventional privatisation, as advocated by the CPS through its history?
Though these have been successful in the past, the difference here is that investors know the price the government paid for the shares. As such, while the shares may approach the level at which they were bought, they are unlikely to move significantly beyond that. This creates an invisible ceiling – the share overhang – meaning the true value of the shares will not be realised on sale (see Obama and GM Motors). Investors demand a significant discount as the stakes are too large for the market to absorb.
A conventional sale would therefore allow the City to charge us extortionate fees to sell our stakes at huge discounts. Institutional investors or sovereign wealth funds, unwilling to take the risk on the banks in the past, would lap up the windfalls. But by instead distributing to the public free and then setting a floor price, the market in the share switches from one large seller at an assumed price, to a broader group of owners with no rational reason to sell at that price. Supply and demand are inverted. Coupled with a £5 billion exchangeable bond, and the placing of £10 billion shares at distribution to kick-start market forces, the Treasury will start to realise receipts at true value to pay back the initial investment. What’s more, we the public get to keep any gain.
So far, you may be thinking this all sounds eerily familiar. The Liberal Democrat MP Stephen Williams wrote a paper for CentreForum on this policy last year. The difference between our paper and his is that we take a closer look at how to treat capital gains – essential to the success of these proposals. Our paper suggests that the exceptional and one-off nature of the distribution means that any proceeds should be unrelated to an individual’s Capital Gains Tax personal allowance, and charged at a flat rate of 18% on the profits. A CGT relief for those who pay the Floor Price to the government outright in the first three months will drive early receipts.
At the same time, we think the use of the electoral register for the distribution list is unfair and unnecessarily political. All taxpayers faced the risks entailed with the bank bailouts, and the distribution should be as far-reaching to UK taxpayers as possible.
This is an innovative proposal rooted in economic theory. Conventional privatisations served the nation well in the 1980s, and I would usually be loath to support universality of anything. But the circumstances here are different. The government borrowed heavily to bail out the banks, and the national debt will continue to increase through this Parliament. It is essential that the government recoups the £66 billion initial investment. At the same time, however, taxpayers bore the full risk of the bailouts. Giving the people a real stake in the bank’s future performance will be a much-needed first step in repairing relations with them.
This proposal ensures any profits wouldn’t be wasted on useless government initiatives, but would sit in our pockets – free to spend it on what we like, when we like. Our risk should mean our reward. When the time is right, the government should ‘Give us our fair share’.