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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Air pollution: 5 steps to vanquishing an invisible killer

A new report looks at the economics of air pollution. 

110, 150, 520... These chilling statistics are the number of deaths attributable to particulate air pollution for the cities of Southampton, Nottingham and Birmingham in 2010 respectively. Or how about 40,000 - that is the total number of UK deaths per year that are attributable the combined effects of particulate matter (PM2.5) and Nitrogen Oxides (NOx).

This situation sucks, to say the very least. But while there are no dramatic images to stir up action, these deaths are preventable and we know their cause. Road traffic is the worst culprit. Traffic is responsible for 80 per cent of NOx on high pollution roads, with diesel engines contributing the bulk of the problem.

Now a new report by ResPublica has compiled a list of ways that city councils around the UK can help. The report argues that: “The onus is on cities to create plans that can meet the health and economic challenge within a short time-frame, and identify what they need from national government to do so.”

This is a diplomatic way of saying that current government action on the subject does not go far enough – and that cities must help prod them into gear. That includes poking holes in the government’s proposed plans for new “Clean Air Zones”.

Here are just five of the ways the report suggests letting the light in and the pollution out:

1. Clean up the draft Clean Air Zones framework

Last October, the government set out its draft plans for new Clean Air Zones in the UK’s five most polluted cities, Birmingham, Derby, Leeds, Nottingham and Southampton (excluding London - where other plans are afoot). These zones will charge “polluting” vehicles to enter and can be implemented with varying levels of intensity, with three options that include cars and one that does not.

But the report argues that there is still too much potential for polluters to play dirty with the rules. Car-charging zones must be mandatory for all cities that breach the current EU standards, the report argues (not just the suggested five). Otherwise national operators who own fleets of vehicles could simply relocate outdated buses or taxis to places where they don’t have to pay.  

Different vehicles should fall under the same rules, the report added. Otherwise, taking your car rather than the bus could suddenly seem like the cost-saving option.

2. Vouchers to vouch-safe the project’s success

The government is exploring a scrappage scheme for diesel cars, to help get the worst and oldest polluting vehicles off the road. But as the report points out, blanket scrappage could simply put a whole load of new fossil-fuel cars on the road.

Instead, ResPublica suggests using the revenue from the Clean Air Zone charges, plus hiked vehicle registration fees, to create “Pollution Reduction Vouchers”.

Low-income households with older cars, that would be liable to charging, could then use the vouchers to help secure alternative transport, buy a new and compliant car, or retrofit their existing vehicle with new technology.

3. Extend Vehicle Excise Duty

Vehicle Excise Duty is currently only tiered by how much CO2 pollution a car creates for the first year. After that it becomes a flat rate for all cars under £40,000. The report suggests changing this so that the most polluting vehicles for CO2, NOx and PM2.5 continue to pay higher rates throughout their life span.

For ClientEarth CEO James Thornton, changes to vehicle excise duty are key to moving people onto cleaner modes of transport: “We need a network of clean air zones to keep the most polluting diesel vehicles from the most polluted parts of our towns and cities and incentives such as a targeted scrappage scheme and changes to vehicle excise duty to move people onto cleaner modes of transport.”

4. Repurposed car parks

You would think city bosses would want less cars in the centre of town. But while less cars is good news for oxygen-breathers, it is bad news for city budgets reliant on parking charges. But using car parks to tap into new revenue from property development and joint ventures could help cities reverse this thinking.

5. Prioritise public awareness

Charge zones can be understandably unpopular. In 2008, a referendum in Manchester defeated the idea of congestion charging. So a big effort is needed to raise public awareness of the health crisis our roads have caused. Metro mayors should outline pollution plans in their manifestos, the report suggests. And cities can take advantage of their existing assets. For example in London there are plans to use electronics in the Underground to update travellers on the air pollution levels.

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Change is already in the air. Southampton has used money from the Local Sustainable Travel Fund to run a successful messaging campaign. And in 2011 Nottingham City Council became the first city to implement a Workplace Parking levy – a scheme which has raised £35.3m to help extend its tram system, upgrade the station and purchase electric buses.

But many more “air necessities” are needed before we can forget about pollution’s worry and its strife.  

 

India Bourke is an environment writer and editorial assistant at the New Statesman.