Leaks on cuts will be punished

Ministers could be hit with further budget cuts if they release early details of their department's

Ministers could be punished for leaking early details of spending cuts with last-minute changes to their budgets, the Financial Times has reported.

With the party conference season about to get underway in earnest, Cameron clearly doesn't want speculation about cuts to distract from the Tories' first conference in government for 13 years, and is planning to use the threat of imposed spending cuts to keep his ministers on message during this period. Control will even extend to the conference itself, the FT reports:

"One senior government official said the Treasury would be vetting all ministerial conference speeches to avoid any hint of new spending commitments."

Provisional deals are already in place for some departments ahead of the announcement of the comprehensive spending review on October 20, but David Cameron is said to be anxious to reveal the spending cuts as a complete package, rather than have different elements leak out at different times, dominating the news cycle and distorting the image he wants to present.

The news that the information will be quite so tightly controlled seems to confirm that Cameron is more than a little concerned about the potential ramifications if the cuts are presented the "wrong" way. Ahead of the AV referendum and the local elections next year, the spending review will be the first major test for the unity of the coalition. David Cameron and George Osborne need to prove to the electorate that their cuts are necessary for recovery, not merely ideological, while Nick Clegg has to keep the left of his party convinced that their interests are served by lending their support. And as my colleague George Eaton pointed out yesterday, opposition to the cuts is gathering momentum on several fronts already, and any leaks of the "outline settlements" currently being negotiated would only fuel this movement further.

Leaking details of departmental proposals to the press used to be a tried and tested way for ministers to try and circumvent the Treasury in securing funding (as immortalised in the first ever episode of The Thick of It). But the FT's "senior government official" warns that this trick won't work this time because Cameron and Osborne are "completely united" on this. So, if any leaks are made over the next few weeks, we'll know it has nothing to do with trying to preserve departmental budgets, and everything to do with personal rebellion against the coalition's leaders.

Caroline Crampton is assistant editor of the New Statesman. She writes a weekly podcast column.

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Let's turn RBS into a bank for the public interest

A tarnished symbol of global finance could be remade as a network of local banks. 

The Royal Bank of Scotland has now been losing money for nine consecutive years. Today’s announcement of a further £7bn yearly loss at the publicly-owned bank is just the latest evidence that RBS is essentially unsellable. The difference this time is that the Government seems finally to have accepted that fact.

Up until now, the government had been reluctant to intervene in the running of the business, instead insisting that it will be sold back to the private sector when the time is right. But these losses come just a week after the government announced that it is abandoning plans to sell Williams & Glynn – an RBS subsidiary which has over 300 branches and £22bn of customer deposits.

After a series of expensive delays and a lack of buyer interest, the government now plans to retain Williams & Glynn within the RBS group and instead attempt to boost competition in the business lending market by granting smaller "challenger banks" access to RBS’s branch infrastructure. It also plans to provide funding to encourage small businesses to switch their accounts away from RBS.

As a major public asset, RBS should be used to help achieve wider objectives. Improving how the banking sector serves small businesses should be the top priority, and it is good to see the government start to move in this direction. But to make the most of RBS, they should be going much further.

The public stake in RBS gives us a unique opportunity to create new banking institutions that will genuinely put the interests of the UK’s small businesses first. The New Economics Foundation has proposed turning RBS into a network of local banks with a public interest mandate to serve their local area, lend to small businesses and provide universal access to banking services. If the government is serious about rebalancing the economy and meeting the needs of those who feel left behind, this is the path they should take with RBS.

Small and medium sized enterprises are the lifeblood of the UK economy, and they depend on banking services to fund investment and provide a safe place to store money. For centuries a healthy relationship between businesses and banks has been a cornerstone of UK prosperity.

However, in recent decades this relationship has broken down. Small businesses have repeatedly fallen victim to exploitative practice by the big banks, including the the mis-selling of loans and instances of deliberate asset stripping. Affected business owners have not only lost their livelihoods due to the stress of their treatment at the hands of these banks, but have also experienced family break-ups and deteriorating physical and mental health. Others have been made homeless or bankrupt.

Meanwhile, many businesses struggle to get access to the finance they need to grow and expand. Small firms have always had trouble accessing finance, but in recent decades this problem has intensified as the UK banking sector has come to be dominated by a handful of large, universal, shareholder-owned banks.

Without a focus on specific geographical areas or social objectives, these banks choose to lend to the most profitable activities, and lending to local businesses tends to be less profitable than other activities such as mortgage lending and lending to other financial institutions.

The result is that since the mid-1980s the share of lending going to non-financial businesses has been falling rapidly. Today, lending to small and medium sized businesses accounts for just 4 per cent of bank lending.

Of the relatively small amount of business lending that does occur in the UK, most is heavily concentrated in London and surrounding areas. The UK’s homogenous and highly concentrated banking sector is therefore hampering economic development, starving communities of investment and making regional imbalances worse.

The government’s plans to encourage business customers to switch away from RBS to another bank will not do much to solve this problem. With the market dominated by a small number of large shareholder-owned banks who all behave in similar ways (and who have been hit by repeated scandals), businesses do not have any real choice.

If the government were to go further and turn RBS into a network of local banks, it would be a vital first step in regenerating disenfranchised communities, rebalancing the UK’s economy and staving off any economic downturn that may be on the horizon. Evidence shows that geographically limited stakeholder banks direct a much greater proportion of their capital towards lending in the real economy. By only investing in their local area, these banks help create and retain wealth regionally rather than making existing geographic imbalances worce.

Big, deep challenges require big, deep solutions. It’s time for the government to make banking work for small businesses once again.

Laurie Macfarlane is an economist at the New Economics Foundation