3 min read

New Business Bank: not as new as it looks

New Business Bank: not as new as it looks

The collapse in the banking system has been bad for the entire economy – but the people feeling it most are those who run and work for small and medium sized enterprises. They are too small to be able to raise money on capital markets, they are instead reliant on the banking system. But the banks don’t want to lend to them.

You can see the story by examining the purple line in this graph, from the Bank of England: small businesses simply aren’t able to get the money they need to keep their businesses afloat. And given it’s small businesses that are responsible for almost all the net new job creation in this country, that in turn helps explain why the economy has been so weak recently.

So, at first glance, it’s probably a relief that the Government has announced it’s going to create a Small Business Bank so it can use its own balance sheet to get cash to the companies who most need it. This is something Vince Cable has been campaigning for for some time.

The problem is that when you look through the small print, the bank doesn’t look all that revolutionary at all. In fact, it will merely bundle together all the existing schemes for lending to small businesses (the Enterprise Finance Guarantee, the Business Finance Partnership, the Enterprise capital fund etc). It won’t involve any new cash for businesses, it won’t mean using the balance sheet of nationalised banks such as RBS. It won’t necessarily have any more autonomy from Government. In short, so far as what has been revealed on it so far, it looks more like a re-branding exercise than anything substantively new.

Having said that, it’s quite possible that the idea starts to germinate in the coming weeks, and my impression is that the Business Secretary will be pushing the Chancellor to include new schemes as the Small Business Bank takes shape. But the Treasury is adamant that it won’t involve any extra public expenditure.

Nor, indeed, was there much new in any of the other policies mentioned by the Chancellor over the weekend. The Infrastructure bill he trumpeted which will be brought before Parliament this week was actually announced in July (remember that awkward photocall with Danny Alexander on a building site?). It will now include guarantees to help housebuilding, increasing the total “firepower” from £40bn to £50bn, but this was pretty much part of the plan as well.

In fairness, the past masters of re-announcing policies was the last Labour Government, in particular Gordon Brown, and his successors have re-announced their policy of an emergency VAT cut countless times already now as well.

The fact that there’s nothing fundamentally new coming from either side of the political aisle should probably not surprise us. After all, there’s nothing fundamentally new about the economic problem we’re facing. The country is encumbered with an extraordinary amount of debt – much of it owed by the financial sector. According to the IMF, Britain’s financial sector has gross debt of a staggering 742% of GDP – worse than any country in the world; the only other country anywhere near close is Ireland, at 691%. Banks don’t want to lend: not only are their balance sheets deeply impaired, they fear that the businesses who want to borrow won’t pay them back.

Without cash, companies are unable to expand and invest. They are unable to take on new employees and expand. As a result, the economy is flatlining at best, contracting at worst.

This is not a new story. In fact, this is now the longest running slump in British economic history. No wonder George Osborne’s popularity has waned so much since those early days when his austerity plan afforded broad support. And the road ahead looks hardly any less bumpy as well.

This article is also available on the Sky News website.

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