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So you want to hang on to RBS?

    The headlines everywhere from the Financial Times to the Independent and the Daily Mail say the same thing: George Osborne is planning to sell the state’s stake in RBS “at a loss”. Chris Leslie, the Shadow Chancellor, says taxpayers want their money back in full, and he’s not the only one – he can count among his allies Caroline Lucas, City AM and the New Economics Foundation, which has started a petition to stop the “fire sale”.

    If you take a look at their line of reasoning, it amounts to little more than the sunk cost fallacy. Having put money into something that has underperformed and lost value, it’s natural to want to hang onto the investment, even when cutting losses and moving on is a more rational choice.

    In 2008, the state spent £45 billion bailing RBS out to prevent it collapsing, and ended up with a stake that is now worth much less. Rothschild has been advising the Government, and stated yesterday that the RBS share price will not recover to pre-2008 levels anytime soon, if ever, and that potential investors were put off from investing precisely because of the high level of state ownership. Cut the losses, and move on.

    There is another argument to be made for the sale, of course. The state is in possession of a £32 billion stake in a huge bank that it never wanted. State enterprise on this scale is undesirable – a simpler, more efficient bank is what is needed right now, not least because RBS has made losses each of the last seven years.

    Finally, public sector net borrowing is forecast to amount to £75 billion in the coming year. Given the spending cuts currently needed to achieve a budget surplus by the end of this Parliament, I’d rather the government had £32 billion handy to fix public finances, rather than leaving the money locked in RBS shares.

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