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

Photo: Getty
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What is the New Hampshire primary, and why does it matter?

Although the contest has proved less influential in recent years, the New Hampshire primary is still a crucial event.

While the Iowa caucuses are the first electoral event in the US’s presidential process, the New Hampshire primary is the candidates' most important early test before the action explodes across the rest of the country.

The stakes are high. If the nominations aren’t decided soon, the campaigns will be damned to a marathon of costly state primaries and caucuses; New Hampshire is their first best chance to avoid that fate. But it didn’t always work this way.

Primaries only became the key element of the nomination process relatively recently. Until the postwar era, presidential candidates were chosen at the national conventions in the summer: in the run-up to the 1960 election, future president John F Kennedy famously entered only one primary (West Virginia’s) to prove that a Roman Catholic could win a Protestant state.

It was only after the turmoil of the 1968 nomination, widely perceived as an establishment fix, that the McGovern-Fraser Commission changed the Democratic party’s rules to end the power of the “smoke-filled room” over the nominating process, prompting many states to adopt meaningful primaries for both parties' nominations.

First in the nation

Unlike caucuses, which generally are used in smaller states that would rather not pay for full-scale ballots, primaries are secret-ballot elections that allow voters to choose who will be their preferred nominee. But not all primaries are the same.

The parties sometimes hold their votes on the same day, as they do in New Hampshire, or on different ones. A primary may be open (allowing any voter to register a preference) or closed (allowing only pre-registered party supporters to vote). New Hampshire has a mixed system which allows voters to register in a primary on the day before voting without declaring a party affiliation.

That means that while all voters registered with a party must vote in that party’s ballot, the New Hampshire result often hinges on these unaffiliated voters. Because they can vote in whichever ballot they like and can register so close to primary day, the state is notoriously difficult to poll.

New Hampshire has cemented its first-in-the-nation status by passing a law that requires its lawmakers to move the state’s primary to pre-empt any other state’s, no matter how early. That means it’s traditionally been not just an important indicator of how candidates are faring, but a way of winnowing the field and generating or killing funding. Candidates who perform poorly generally find their access to money suddenly dries up.

The arguments against New Hampshire’s outsize role are many. Like Iowa, it’s hardly representative of the US as a whole, being a small state with an overwhelmingly white population. And while (unlike Iowa) it has no powerful evangelical Christian element, it retains a very distinctive tradition of small-town New England politics that demand a particular kind of face-to-face, low-to-the-ground campaigning.

But this time around, other factors have cut into New Hampshire’s significance.

On the Republican side, the primary’s winnowing role was in large part pre-empted when the TV networks holding debates allowed only the higher-polling candidates on stage, effectively creating a two-tier system that tarred lower-polling candidates as also-rans long before voting began. Meanwhile, the financial calculations have been transformed by campaign finance reforms that allow for almost unlimited outside fundraising – allowing candidates to build up the reserves they need to withstand a humiliating defeat.

Nonetheless, a truly surprising New Hampshire result could still change everything.

Shuffling the deck

New Hampshire hasn’t always chosen the winner in either the nomination contests or the general election. But it has provided more than its share of political upsets and key turning points, from persuading Lyndon Johnson not to stand again in 1968 to resurrecting the candidacies of Hillary Clinton and John McCain in 2008.

The incremental campaigns for the nominations are all about the perception of momentum, and a notional front-runner can be dislodged or destabilised by a poor performance early on. That’s especially true in this year’s cycle, in which both major parties are grappling with huge surges of support for outsider, anti-establishment candidates.

Mainstream Republicans have spent months trying to end Donald Trump’s noisy domination of their crowded field. Trump was indeed defeated in Iowa, but not by a moderating force: instead, it was radical conservative Ted Cruz who overturned him.

Cruz is loathed by the party establishment, and he stands little chance of appealing to mainstream voters. Marco Rubio’s strong showing in Iowa briefly made him something of a standard-bearer for the party’s moderates, but a disastrous turn at the last debate before New Hampshire has thrown the future of his candidacy into doubt.

The primary will also reveal who, if any, of the more moderate Republican candidates – among them Jeb Bush, John Kasich and Chris Christie – will survive. While Bush has a massive funding advantage (albeit with precious little to show for it), Kasich and Christie both need a strong showing in New Hampshire to reinvigorate their financial reserves.

On the Democratic side, the key question is whether Bernie Sanders can make good on the surprising energy of his populist, grassroots challenge to Hillary Clinton. He is currently the heavy favourite in New Hampshire: even if Clinton somehow pulls off a miracle win there as she did in 2008, the closeness of the race is already stimulating both campaigns' national organisation and spending. And with what could be a long race between them heating up, the two’s growing mutual acrimony may yet start to undermine the Democrats' national appeal.

Gillian Peele Associate Professor in Politics and Tutorial Fellow at the University of Oxford.

This article was originally published on The Conversation. Read the original article.