We need a proper British Investment Bank, not Osborne's half measure

The Chancellor's small business bank is too modest to make a significant difference to growth.

The latest growth initiative from George Osborne is a state-backed small business bank. The Chancellor said over the weekend that the difficulties small businesses face when trying to get the credit they need to keep going or to expand is one of the biggest problems holding back the UK economy. He has already tried to ease this problem with "Project Merlin" (lending targets for commercial banks), a national loan guarantee scheme and most recently the "funding for lending" initiative. Depending on your option, his latest idea can be seen as building on these previous schemes, or an acceptance that they were not up to the task of getting credit flowing in the economy.

But will it work? That will depend very much on how ambitious the Chancellor chooses to be – and the first signs are not encouraging. The bank is being described as a "one-stop shop": bringing together in one place all the various schemes and initiatives designed by government to help small businesses. No doubt this will be helpful for small businesses, making it easier for them to find a way through the Whitehall maze. But what small businesses really want is an increase in the amount of credit available to them and a reduction in the cost of that credit. It is not immediately apparent that the Chancellor’s new bank will deliver on these aims.

Other countries have national investment banks of varying descriptions, including the KfW in Germany and the Small Business Administration in the United States, and the Chancellor’s idea seems most closely modelled on the latter. But importing wholesale the model of any one overseas bank is unlikely to be the best approach.

What we need in the UK is a fully-fledged British Investment Bank designed to suit the particular circumstances of our economy. This Bank should be set up to tackle two longstanding problems: a tendency to invest less in infrastructure (as a share of GDP) than comparable economies and a shortage of financing, particularly long-term financing, for small and medium-sized businesses.

There are a number of important questions to be addressed before such a Bank could set up – and, like the Green Investment Bank, it would need to secure EU state aid approval - but some of the parameters should be clear. The Bank would be 100 per cent state-owned. Its remit would be to increase lending for infrastructure and to SMEs. And its governance structure would have to ensure there was a clear dividing line between where the role of the government ended and the activities of the bankers began.

More controversial would be the capitalisation of the Bank and its ability to raise additional funds in the capital markets. The Green Investment Bank will have an initial capitalisation of £3bn and will not be able to borrow money at least until the government debt ratio is on a downward trajectory (because its activities count as part of the public sector). The same consideration would, no doubt, prevent the current Chancellor from creating a fully-fledged British Investment Bank.

But there is a qualitative difference between the government having to borrow because its current spending commitments are greater than the sums it is prepared to raise in taxes and a BIB raising funds in asset markets to use to finance infrastructure projects that will generate a stream of income in the future, or to lend to small businesses. A British Investment Bank should not be held back by the vagaries of the UK’s accounting practices. Its activities (and those of the Green Investment Bank) should be excluded from the government’s target fiscal measures and it should be free to raise funds up to a pre-determined leverage ratio

The government would, though, have to provide the new Bank with its initial capital. One option would be tell the Bank of England to do another round of quantitative easing specifically for this purpose. Alternatively, the funds would have to be found by cutting other spending, increased taxation, the sale of government assets or extra borrowing. Given the Chancellor’s unwavering adherence to his fiscal plans, this is likely to be a stumbling block to any hopes of a British Investment Bank in the next few years.

And this is now the biggest problem facing the UK economy. Because the Chancellor will not spend more money boosting aggregate demand in the economy, whether directly through infrastructure spending or a temporary tax cut or indirectly by capitalising a British Investment Bank with a directive to lend to small businesses, he is reduced to indirect schemes like funding for lending or the pension infrastructure plan. These require shifts in behaviour by the banks and pension schemes if they are to work. Unsurprisingly, they are not as effective as more direct approaches.

The Chancellor’s state-backed small business bank fits into the same pattern. It is a half measure, bringing together existing initiatives, rather than the creation of the fully-fledged British Investment Bank that the economy really needs.

Tony Dolphin is Chief Economist at IPPR

Chancellor George Osborne plans to create a state-backed small business bank. Photograph: Getty Images.

Tony Dolphin is chief economist at IPPR

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Sadiq Khan's decision to scrap the Garden Bridge is a victory for ordinary Londoners

Perhaps the rich really do want to give something back to London. If they do, I'm sure it'll be lovely. But if they don't, I'm bloody glad I don't have to pay for it.

The obvious question about the Garden Bridge is: where did it all go wrong?

The bridge, after all, should have been a lovely addition to the fabric of the city. An oasis of greenery in an area devoid of it, a new way of crossing the river and a new tourist attraction, akin to New York's High Line, all rolled into one. The Garden Bridge was not like the hilariously pointless “Emirates Air Line”, the cable car to nowhere which is even now ferrying empty pods between two windswept ex-industrial estates in a deserted bit of east London, like one of the follies listed by Marge Simpson at the end of Marge vs the Monorail. The Garden Bridge should have been great.

Yet in the years since it was first proposed, it's sunk further and further into controversy. The Garden Bridge Trust, the charity responsible for getting it built, has failed to raise enough money or acquire the land required to start construction before planning permission runs out this December. Official reports have repeatedly raised questions about the Trust's financial plans.

And today's news that London's mayor Sadiq Khan has written to the Garden Bridge Trust to tell it that the taxpayer would not provide the financial guarantees required for work to continue – effectively killing the scheme – is more likely to be celebrated than mourned. So how did something so lovely end up so loathed?

The obvious explanation is the growing sense that the whole thing has been a bit of a con. When first the bridge was proposed, the intention was that it would be largely privately funded, with just a smidgen of Transport for London money required to get things moving.

The longer things went on, though, the more the ratio between those two sources of funding seemed to change. The predicted cost of the bridge continued to climb; yet the amount of money promised by private donors first flatlined, then began to slide.

So the amount of cash the taxpayer was going to have to put into this thing soared, with no end in sight: without a clear plan for funding the upkeep and maintenance of the bridge, it seemed likely to become a permanent line in the capital's own budget. As a result what had once been pitched as a gift to London began looking more and more like a pointless indulgence we would have to pay for ourselves. It felt like we’d been had.

But I think there's another, more philosophical reason why a lovely idea like a Garden Bridge should have become so unpopular: it fitted with a lingering sense that something has gone terribly wrong with this city.

We are, after all, in the middle of a housing crisis, which is seeing even relatively well-off people forced out of the city, and which has forced untold numbers to live in tiny under-regulated patches of squalor. The official definition of “Affordable Housing” has become a bad joke, yet new housing developments bend over backwards to avoid making even this limited provision. And in the midst of all this, the most visible property developments aren't much-needed homes for the masses, but commercial skyscrapers and luxury apartments.

Contemporary London prides itself on its tolerance and diversity and the way different social classes are all jumbled up together, without any of the ghettoisation seen in, say, Paris. Yet huge chunks of what look like public space are now private estates, often patrolled by private security. In our flattering, metropolitan liberal self-image, this isn't what London is meant to be.

It was, however, exactly what the Garden Bridge was going to be: a private garden masquerading as public space, yet funded by the taxpayer. The people most determined to see it built were a flotilla of rich, posh people: Boris Johnson, George Osborne, Thomas Heatherwick, Joanna Lumley. They were not us, but them – yet still they expected us to pay for it.

And then, once in a while, the bridge would close so that an investment bank or a private equity firm could throw a garden party, drinking champagne and eating canapes in full view of London as a whole, on a bridge we paid for but which we were not allowed to cross.

Perhaps the project isn't dead. Perhaps the Garden Bridge Trust will somehow find enough donors to get it finished without taxpayer support, and even find a way of funding its upkeep. Perhaps the rich really do want to give something back to London. If they do, I'm sure it'll be lovely.

But if they don't, I'm bloody glad we will no longer have to pay for it. This city has quite enough symbols of economic division as it is.

Jonn Elledge is the editor of CityMetric, where this blog post was originall published. He is on Twitter as @jonnelledge and also has a Facebook page now for some reason. 

 

Jonn Elledge edits the New Statesman's sister site CityMetric, and writes for the NS about subjects including politics, history and Daniel Hannan. You can find him on Twitter or Facebook.

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