A brave plan to reprivatise RBS would give the coalition common purpose

 
Ryan Bourne
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DEPUTY Prime Minister Nick Clegg has urged his Conservative coalition partners to focus on issues that unite the government. Voters don’t want to see squabbling over gay marriage or Europe, he said last week.

Of course, it’s hard to believe they were particularly engrossed by House of Lords reform or the alternative vote referendum either. But Clegg has a point. If the coalition is to hobble through to 2015 (which both he and the Prime Minister seem determined will happen) then it needs some policies which both parties can rally around, besides its stalling deficit reduction plan.

So what policy has, at different times, been backed by Liberal Democrats such as Stephen Williams MP, Clegg and Vince Cable, as well as Conservatives including John Redwood, Steve Baker and Matthew Hancock? What area of policy might the two parties agree should be dealt with before a Labour government (with a profoundly different philosophical outlook) potentially obtains power? What type of policy could capture the public imagination?

It’s difficult to think of a more obvious area than the much-mooted re-privatisations of Lloyds and RBS. In recent weeks, Lloyds shares have exceeded the price (61p) the coalition set out as the taxpayer “break-even” price. RBS’s chief executive Stephen Hester believes his bank will be ready for re-privatisation by 2014. The IMF has even waded in, urging the government “to return the banks to private hands in a way that maximises the value for taxpayers, strengthens confidence and competition in the sector, and minimises outward spillovers.”

It seems certain the smaller Lloyds stake (the government holds 39 per cent) will be divested soon. But the large RBS stake (81 per cent) represents an opportunity to do something radical and different – not least because of the practical difficulties divesting such a large shareholding conventionally would have on share value, and the political problem of who any future upside in share value goes to.

This explains why people are thinking outside the box. Conservative MP Nadhim Zahawi, for example, believes the shares should be given away for free to all taxpayers, as a sort of economic stimulus.

But the experience of Russia suggests this would cause a rush to sell the shares to realise small gains, causing the price to plummet and oligarchs and hedge funds to get rich.

Yet the Prime Minister understandably wants as wide a distribution as possible. The Centre for Policy Studies argued in 2011 that the government should, therefore, distribute the shares to all individuals with a national insurance number for free, but set a floor price below which the shares could not be sold. On sale, the floor would be returned to the Treasury, with any profit above it kept by the shareholder.

This would get the stakes back into the private sector, eliminate the bulk of the share overhang problem in one swoop, and guarantee funds to contribute to the public finances as the shares are traded in future. The technology exists to do this and, most importantly, it would not entail the immediate rush-to-exit to sell shares which the Zahawi proposal encourages.

The interests of the banks and the public would then be observably aligned. And with the many MPs mentioned above already supportive, it could also give the Conservatives and Liberal Democrats much-needed common ground on a major, popular policy. In what other areas can we currently say that?

Ryan Bourne is head of economic research at the Centre for Policy Studies.