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

Getty
Show Hide image

This is no time for a coup against a successful Labour leader

Don't blame Jeremy Corbyn for the Labour Party's crisis.

"The people who are sovereign in our party are the members," said John McDonnell this morning. As the coup against Jeremy Corbyn gains pace, the Shadow Chancellor has been talking a lot of sense. "It is time for people to come together to work in the interest of the country," he told Peston on Sunday, while emphasising that people will quickly lose trust in politics altogether if this internal squabbling continues. 

The Tory party is in complete disarray. Just days ago, the first Tory leader in 23 years to win a majority for his party was forced to resign from Government after just over a year in charge. We have some form of caretaker Government. Those who led the Brexit campaign now have no idea what to do. 

It is disappointing that a handful of Labour parliamentarians have decided to join in with the disintegration of British politics.

The Labour Party had the opportunity to keep its head while all about it lost theirs. It could have positioned itself as a credible alternative to a broken Government and a Tory party in chaos. Instead we have been left with a pathetic attempt to overturn the democratic will of the membership. 

But this has been coming for some time. In my opinion it has very little to do with the ramifications of the referendum result. Jeremy Corbyn was asked to do two things throughout the campaign: first, get Labour voters to side with Remain, and second, get young people to do the same.

Nearly seven in ten Labour supporters backed Remain. Young voters supported Remain by a 4:1 margin. This is about much more than an allegedly half-hearted referendum performance.

The Parliamentary Labour Party has failed to come to terms with Jeremy Corbyn’s emphatic victory. In September of last year he was elected with 59.5 per cent of the vote, some 170,000 ahead of his closest rival. It is a fact worth repeating. If another Labour leadership election were to be called I would expect Jeremy Corbyn to win by a similar margin.

In the recent local elections Jeremy managed to increase Labour’s share of the national vote on the 2015 general election. They said he would lose every by-election. He has won them emphatically. Time and time again Jeremy has exceeded expectation while also having to deal with an embittered wing within his own party.

This is no time for a leadership coup. I am dumbfounded by the attempt to remove Jeremy. The only thing that will come out of this attempted coup is another leadership election that Jeremy will win. Those opposed to him will then find themselves back at square one. Such moves only hurt Labour’s electoral chances. Labour could be offering an ambitious plan to the country concerning our current relationship with Europe, if opponents of Jeremy Corbyn hadn't decided to drop a nuke on the party.

This is a crisis Jeremy should take no responsibility for. The "bitterites" will try and they will fail. Corbyn may face a crisis of confidence. But it's the handful of rebel Labour MPs that have forced the party into a crisis of existence.

Liam Young is a commentator for the IndependentNew Statesman, Mirror and others.