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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The English left must fall out of love with the SNP

There is a distinction between genuine leftism and empty anti-establishmentarianism.

After a kerfuffle on Twitter the other night, I am all too aware that writing something even mildly questioning of the SNP government is the British equivalent of approaching a lion pride on a kill. Nevertheless, seeing the almost hero-levels of mental gymnastics tweeted by Mhairi Black, in the week of the Hillsborough inquiry whereupon Nicola Sturgeon posed with a copy of The Sun endorsing her re-election, prompted me once more to consider just how spectacular the distance has become between the SNP that stood against Ed Miliband versus the SNP today and in government.

Mhairi tweeted: “So Kezia wants to put up the taxes of Scottish people to subsidise Tory cuts that her party supported in Westminster?”. Confused? So am I.

This follows in a series of SNP revisionism on what austerity is and the excuses the SNP has hidden, not quite so conspicuously, up its sleeve to not act on its new tax powers, so as not to break its bond with Middle Scotland. They insist that Labour’s plans for a penny tax are not progressive, and have framed it in such a way that an anti-austerity plan has now become a subsidy for cuts Labour actually haven’t supported for more than a year now. Just like that, the SNP is a low-tax mimicry of Toryism.

But it isn’t ‘just like that’. The SNP have governed from an economically cautious stance for seven years. For a brief period, they borrowed Ed Miliband’s clothes. But once the Red Wedding had been completed, they returned back to where they started: as successors to New Labour, though that is hardly fair: they are far, far less redistributive.

So why is it, in the 2015 election, and even today, many of us on the left in England still entrust our faith in SNP rhetoric? Still beat the drum for an electoral ‘progressive’ coalition with a party that doesn’t seem very happy to embrace even the concept of higher taxes?

My theory is that the SNP have successfully, indeed more successfully than any party in Britain, adopted the prime hobby of much of the Left: ‘againstism’.

‘Againstism’, clumsy I admit, is to be against everything. This can include a negative framing of being anti-austerity but not pro-anything in its place. But in this instance, it means to be anti-establishment. The latter, the establishment, is what Labour as a party of government always has aspired to be in competing to be the national government in Westminster - which is why elements of the Left will always hate it and will always vote against it. In a way, some of the left is suspicious of governance. This is occasionally healthy, until it prevents real progressivism from ever being elected.

While in government, Labour could be seen as sell-outs, rightly or wrongly, because they became the establishment and had no one but themselves to blame. The SNP are the establishment, in Scotland, but can nevertheless exercise ‘againstism’, even with new tax powers. They always will so long as Westminster exists, and so long as their main motivation is independence. This is why the bogeymans that sustain nationalism are not natural allies of social democracy; to achieve social democracy would be to remove the bogeyman. This means that the Lesser New Labour tradition within which they govern will continue to go unnoticed, nor be doomed to eventual death as New Labour itself suffered, nor be looked back on as an era of neoliberalism. The SNP can just avert attentions back to the Westminster establishment. ‘Againstism’. Paradoxically, the way the SNP have managed to come to exploit this is because of New Labour's devolution. Devolution has created, for the first time, the perfect environment for an establishment in one part of the country to blame the establishment in another. It has allowed for the rise of an incumbent insurgent. The SNP can campaign as insurgents while still being incumbents. It is a spectacular contradiction that they alone can manage.

Insurgency and anti-establishment politics are not, of themselves, a bad thing. We on the Left all dip our toes in it. It is a joy. It is even more fun for us to be successful. Which is why the celebratory mood that surrounded the SNP gains in Scotland, a paradigm shift against one incumbent for another, is, objectively, understandable. But these insurgents are not actually insurgents; they are the illusion of one, and they have had the reigns of power, greater now for the Scotland Bill, for seven years. And they have done little radical with it. The aim of an anti-establishment politics is to replace an establishment with something better. All the SNP have done is inherit an establishment. They are simply in the fortunate position of managing to rhetorically distance itself from it due to the unique nature of devolution.

This is why some of the Left still loves them, despite everything. They can remain ‘againstists’ regardless of their incumbency. They do not have the stench of government as a national Labour government did and inevitable would have. So the English Left still dream.

But now, with this mounting evidence and the SNP’s clumsy revisionism, it is up to the English Left to distinguish between genuine leftism and empty anti-establishmentarianism, and to see the establishment -via governance- as something to define for itself, to reshape as something better, rather than something to be continuously against. This is, after all, what Attlee's government did. The SNP have not defined the establishment, they have continued someone else's. It's up to us to recognise that and fall out of love with the SNP.