Balls’ new rules

It’s Ed Balls’ speech today, and he’s cleared it with Ed Miliband – a courtesy that Gordon Brown never extended to Tony Blair. He promises to introduce a new set of fiscal rules, which I’m sure will make the nation’s heart leap, given how well the last set of fiscal rules worked. But what jumps out at me is his pledge to use any money raised from flogging off the banks for deficit reduction, rather than a giveaway.

Here’s what Balls is expected to say, ‘Even as bank shares are falling again, David Cameron and Nick Clegg are still betting on a windfall gain from privatising RBS and Lloyds to pay for a pre-election giveaway. We could also pledge to spend that windfall. But – just as with the 3G mobile phone auction – we will commit instead in our manifesto to do the responsible thing and use any windfall gain from the sale of bank shares to repay the national debt. That will be Labour’s choice – fiscal responsibility in the national interest.

Balls is cleverly tapping into the widely-held myth that the nationalised banks will be sold at a massive profit. The Office for Budget Responsibility looked at this in March, and put an indicative £3.4 billion price tag on the bank disposals: a far cry from the £22 billion which Brown raised from the 3G mobile license auction. If banked, it would accelerate Britain’s deficit reduction by about eight days. But given what’s happened to bank shares since March, Osborne will be lucky to make any profit from the banks at all.

As I argued on budget day, Osborne will probably raise more money from next year’s 4G mobile license auction, which netted the Germans 4.4 billion euros. There is, alas, no massive windfall to help Cameron in the way that the North Sea helped Thatcher.

PS: The OBR passage on the banks is short enough (Box 4.2, pdf) to reproduce:

‘In the November ‘Economic and fiscal outlook’ we certified the Treasury’s approach for calculating the overall direct net cost or benefit to the taxpayer of the interventions taken to stabilise the financial sector. This is highly uncertain and will depend in large part on the eventual sale price for the Government’s shareholdings in RBS and LBG, which it is not possible to predict with any confidence. The Treasury’s approach therefore uses market prices to value these shares. On the basis of latest market prices this implies a loss of £1.6 billion on these investments. The Treasury then uses the Asset Protection Agency’s central projection of a net benefit to the taxpayer from Asset Protection Scheme of £5 billion, including fee income. The aggregate costs of all other interventions are not expected to be material once fees, income and recoveries are taken into account. Overall, this implies an estimated eventual benefit to the taxpayer of £3.4 billion.’