Banks’ Budget boost
Surge in Lloyds and RBS shares adds £4.5BILLION to the Chancellor’s books
THE Chancellor is in line to enjoy a £4.5billion Budget boost next week thanks to three months of surging bank share prices, with the taxpayer likely to see a half billion pound profit on their shares in Lloyds Banking Group.
The Government stake in Royal Bank of Scotland is still showing a huge loss, but even its shares have risen strongly since the Autumn Statement in November 2016. The increase will provide a welcome boost to the outlook for public debt when new figures are published alongside the Budget on March 8.
Rising bank share prices have delivered a turnaround for the Government’s stake in Lloyds. In November, the Office for Budget Responsibility said the Government was heading for a £400million loss on its stake.
But Lloyds shares have recovered as prospects for the UK economy improve. Last week’s announcement of a near-tripling in pre-tax profits and the proposed payment of £2.2 billion in dividends have seen them soar further.
At Friday’s closing price of 69p, the Government’s 3.8 per cent stake in Lloyds was worth almost £1.9billion. The Treasury has already recovered £19billion from share sales and dividends, and it is due a further £80million from the dividends announced last week.
That puts it on course to recover £21 billion in total from Lloyds. Gordon Brown’s Government paid £20.5 billion for the shares at the height of the financial crisis in the autumn of 2008.
Official estimates, which include the £3.2billion of other payments made by Lloyds to the Government, but also the £3.6billion cost to the Treasury of borrowing the bailout money, will show a reduced profit. However, the taxpayer will still emerge at least £100million ahead.
The Government is likely to have sold its remaining stake in Lloyds by the end of May, leaving the bank, which f first used its famous black horse
log logo in 1677, independent again. But sales of further RBS shares are unlikely until the bank has settled a case with the US Department of Justice over sub-prime mortgage lending before the global financial crisis.
The bank said last week that it was no closer to reaching a resolution of the issue than it was last month – when it set aside £3.1billion to settle the likely bill.
The Government injected £45.8billion into RBS at the time of the crisis. At the last official calculation the Government had raked in £8billion in fees and its stake was worth just £16 billion – meaning taxpayers are tens of billions out of pocket on paper. Shares in RBS fell last week after it announced yet another mammoth loss, but the stock is still well up since that official tally of the taxpayer’s stake in November, having risen from 188p a share to 245p at Friday’s close. The increase has cut the Government’s loss by £4 billion. Adding the £500million increase in Lloyds shares, the £4.5bil- lion boost comes as the Chancellor puts together what he hopes will be a ‘low-key’ Budget. Economists are divided on whether Hammond will use the slightly brighter outlook for the £1,800billion national debt as an excuse for a few giveaways in his Budget. David Kilshaw, at accountancy group EY, said Hammond may also consider introducing tapping the rich with a special capital gains tax rate. He said: ‘Recent Budgets have introduced the concept of capital gains tax for particular assets, such as property. The Chancellor could find this an attractive trend and perhaps introduce a rate for luxury assets.’
But Samuel Tombs, chief UK economist at consultancy Pantheon Macroeconomics, expected Hammond to resist the urge to spend. He said: ‘We expect him to broadly stick to current plans. Borrowing over recent months has been lower than the Office for Budget Responsibility expected in November, and the Chancellor has some “fiscal headroom” to increase spending and still meet his new fiscal rules.
‘But he will want to retain scope to loosen policy in 2019, when Brexit is likely to happen and when the next Election will be rapidly approaching.’
Strong January public finance figures have led some to believe that the Chancellor may step in to provide a boost to selected groups.
Howard Archer, chief UK economist at researcher IHS Global Insight, said: ‘He could choose to provide some modest help to households, particularly the worse off, as purchasing power is increasingly squeezed by rising inflation.
‘Or he could decide to give limited extra money to the NHS.’