Nadhim Zahawi MP: How the Treasury should "think outside the Bank" with RBS shares

Nadhim Zahawi MP is the MP for Stratford on Avon. Follow Nadhim on Twitter.

The publication of RBS's first quarter results last week, which saw the bank move from a £1.5bn loss to an £826m profit, has re-opened the debate about what to do with the Government's 81% stake.

What's clear is that those inside RBS believe that the bank will soon be ready to return to privatised ownership. Both Stephen Hester, the bank's CEO and Sir Philip Hampton, RBS's chairman, commented as such this week. What isn't clear though is exactly how the government will choose to do it, and when.

One option is to simply sell the shares at their current value, taking a loss on the 407p a share book price, but seeing that loss offset by the benefit of returning RBS to the private sector. Although were that to be done today then, at the current share price of around 288p, a loss of about £13bn to the country's permanent debt would be transferred to the national debt.

There have been many mechanisms proposed for such a sell-off, from a sale to institutional investors to a 'Tell Sid' style public offering at a discounted price. But as both approaches would see the government make a loss, neither see the public gain from their investment in the firm.

After all, every British taxpayer has been paying the debt interest on the £45.5bn that the last government borrowed to prop up RBS. Whilst a straight institutional sale gets RBS out of the Government's hair, and would better suit the smaller holding in Lloyds, it does nothing to reward the taxpayer for its majority ownership. And whilst a reduced price public offering helps those with the spare capital or with disposable income, it does nothing to reward the hard-working family on a low income or the family that simply has no disposable cash. Every taxpayer paid in to rescue RBS - so every taxpayer should benefit.

That's why I firmly believe that the government should simply give away the shares as soon as possible, and in as simple a manner as possible. RBS's strap-line is "think outside the bank", the Treasury should take note and do the same.

Depending on when a giveaway was carried out, it would mean every income tax payer getting around £800 worth of shares to do with as they please. That's a multi-billion dollar stimulus for the economy that requires no extra borrowin,  and is already factored in by the markets. Whilst it would see the official national debt rise and be posted to the deficit this year, that is simply accounting slight of hand - moving figures from one column (PSND including financial interventions) on a spreadsheet to another (PSND excluding financial interventions). It will make no actual difference to the UK's fiscal position and, if anything, may help it.

Why? Because that £800 will make people not only feel richer, but actually be richer. Some people will sell their shares immediately, and spend the resulting cash in the economy (a direct stimulus), others will hold on to them and watch their value rise. To ensure the market isn't flooded with shares. we could encourage longer term ownership by giving away two thirds now, with the promise of part of the additional third if you remain a shareholder in 2 or 3 years time.

By the time of the next election, the giveaway shares will have risen in value. We will be able to point to both that and a growing economy as evidence that our economic policies are delivering - that people are better off than they were in 2010.

There are some who discount the idea of a mass share giveaway as something that will spook institutional investors and leave RBS with more problems than benefits. The quip that RBS would have to hire a football stadium for its AGM is typical of this. Yet wouldn't it be an amazing thing if that many shareholders actually wanted to exercise their rights.

The lack of interest by institutional shareholders and their single minded focus on short term profits was partly the reason RBS got into trouble, so wouldn't some "wisdom of the crowds" oversight by the general public be a positive rather than a negative thing. They are after all those who use and rely on the banking sector every day.

And there are other benefits. Compared to the years following "Tell Sid" individual share ownership has fallen dramatically, from 28% in 1981 to just 10.2% today, so something  that introduces an entire new generation to share ownership can only be a good thing. It will boost savings rates by encouraging share ownership as a long term method of saving, and improve engagement by the general public with corporate governance.

It is in short a political, social and economic win-win, and is something the Chancellor should begin as soon as possible.