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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How English identity politics will shape the 2017 general election

"English" voters are more likely to vote Conservative and Ukip. But the Tories are playing identity politics in Scotland and Wales too. 

Recent polls have challenged some widely shared assumptions about the direction of UK elections. For some time each part of the UK has seemed to be evolving quite distinctly. Different political cultures in each nation were contested by different political parties and with different parties emerging victorious in each.

This view is now being challenged. Early general election surveys that show the Tories leading in Wales and taking up to a third of the vote in Scotland. At first sight, this looks a lot more like 1997 (though less enjoyable for Labour): an increasingly hegemonic mainland party only challenged sporadically and in certain places.

Is this, then, a return to "politics as normal"? Perhaps the Tories are becoming, once again, the Conservative and Unionist Party. Maybe identity politics is getting back into its box post Brexit, the decline of Ukip, and weak support for a second independence referendum. We won’t really know until the election is over. However, I doubt that we’ve seen the back of identity politics. It may actually bite more sharply than ever before.

Although there’s talk about "identity politics" as a new phenomenon, most votes have always been cast on a sense of "who do I identify with?" or "who will stand up for someone like us?" Many voters take little notice of the ideology and policy beloved of activists, often voting against their "objective interests" to support a party they trust. The new "identity politics" simply reflects the breakdown of long-established political identities, which were in turn based on social class and collective experiences. In their place, come new identities based around people, nations and place. Brexit was never really about the technocratic calculation of profit and loss, but about what sort of country we are becoming, and what we want to be. 

Most social democratic parties in Europe are struggling with this change. Labour is no different. At the start of the general election, it faces a perfect storm of changing identities. Its relationship with working-class voters continues to decline. This is not because the working class has disappeared, but because old industries, with their large workplaces, shared communities and strong unions are no longer there to generate a labour identity. 

Labour is badly adrift in England. The English electorate has become increasingly assertive (and increasingly English). The Brexit vote was most strongly endorsed by the voters who felt most intensely English. In the previous year’s general election, it was fear of Scottish National Party influence on a Labour minority government that almost certainly gave the Tories the English seats needed for an overall majority. In that same election, Labour’s support amongst "English only" voters was half its support amongst "British only" voters. The more "English" the voters, the more likely they were to vote Ukip or Conservative. It shouldn’t be a surprise if Ukip voters now go Tory. Those who think that Ukip somehow groomed Labour voters to become Tories are missing the crucial role that identity may be playing.

So strong are these issues that, until recently, it looked as though the next election - whenever it was called - would be an English election - fought almost entirely in English battlegrounds, on English issues, and by a Tory party that was, increasingly, an English National Conservative Party in all but name. Two powerful identity issues are confounding that assumption.

Brexit has brought a distinctly British issue into play. It is enabling the Tories to consolidate support as the Brexit party in England, and at the same time reach many Leave voters in Wales, and maybe Scotland too. This serendipitous consequence of David Cameron’s referendum doesn’t mean the Tories are yet fully transformed. The Conservative Party in England is indeed increasingly focused on England. Its members believe devolution has harmed England and are remarkably sanguine about a break up of the union. But the new ability to appeal to Leave voters outside England is a further problem for Labour. The Brexit issue also cuts both ways. Without a clear appeal cutting through to Leave and Remain voters, Labour will be under pressure from both sides.

North of the border, the Tories seemed to have found - by accident or design - the way to articulate a familial relationship between the party in Scotland and the party in England. Scottish Conservative leader Ruth Davidson appears to combine conservatism, unionism and distance from English politics more successfully than Scottish Labour, which must ride the two horses of "near home rule" and committed unionism. Scottish Labour has a perfectly good call for a reformed union, but it is undermined by the failure of Labour in England to mobilise enough popular support to make the prospect credible.

Identity politics is not, of course, the be all and end all of politics. Plenty of voters do cast their ballots on the traditional tests of leadership, economic competence, and policy. Labour’s campaign will have to make big inroads here too. But, paradoxically, Labour’s best chance of a strong result lies in taking identity politics head on, and not trying to shift the conversation onto bread and butter policy, as the leaked "talking points" seem to suggest. Plenty of voters will worry what Theresa May would do with the untrammelled power she seeks. Challenging her right or ability to speak for the nation, as Keir Starmer has done, is Labour’s best bet.

 

John Denham was a Labour MP from 1992 to 2015, and a Secretary of State 2007 to 2010. He is Director of the Centre for English Identity and Politics at Winchester University

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