Sam Gyimah MP: The Chancellor should use credit easing to change the lending landscape for British business
Sam Gyimah is the Member of Parliament for Surrey East.
In troubled economic times, effective Governments act boldly. And with low borrowing rates and our AAA credit rating still intact, the coalition is reaping the rewards of its far-sighted decision to make deficit reduction a priority when it was not the International consensus. The hurricane Ed Balls forecast last year may indeed be wreaking havoc on the continent, but the Coalition is building its house on solid economic foundations. Now the challenge is to restore prosperity, and again there is scope for the Chancellor to be radical in reshaping the lending landscape, so that businesses get the capital they need to grow.
The Autumn Statement next Tuesday is an ideal opportunity. Investment in businesses continues to be held back by levels of bank lending, which have remained low since 2008 and are likely to fall further as the Eurozone crisis deepens. This is why credit easing is necessary and right. The concept is to inject new money into vital parts of the economy, specifically by making it easier for small and medium enterprises to access the finance they need to create jobs and fuel Britain’s economic recovery. Expectations are that credit easing will involve a partial Government guarantee on loans made to businesses through the banks, thus allowing the overall amount of business lending to increase.
But in making his announcement next week, the Chancellor has the opportunity to go much further than stimulating lending to business in the short term and to deal with the deep-seated problem which is that our banking sector in too concentrated and uncompetitive, working well for the banks but not always for the businesses. Most businesses will tell you that their relationship with their bank is on a take it or leave it basis. That is why in a report published today (in conjunction with NESTA) after a four month consultation with business-owners, entrepreneurs, investors and economists, I have argued that credit easing could go ‘beyond the banks’ to unlock news pools of capital to finance UK SME's.
In the short term, a new institution could be created to buy small and medium-sized businesses’ debts from banks and other financial institutions. With a partial guarantee from the Treasury - thus sharing the risk with the banks - these debts could be bundled together and sold to institutions and retail investors through a bond market, and in the process freeing banks to lend while bringing into play a wealth of new investors. Savers who invest in these bonds would receive a higher rate of interest than they would at their bank, as well as the chance to support British businesses at a national or even regional level. It may seem too radical a proposal, but there are successful examples of similar structures from the US, Germany, Italy and France and here in the UK we already have all the elements in place to implement such a policy. That said, attracting retail investment into business lending could provide an important fillip to our economy just like the popular privatisations of the 1980s.
Indeed, the early signs are that these ‘British Industry & Enterprise Bonds’ (BIEB) would be a welcome innovation. The proposal already has the support of the London Stock Exchange, British Chambers of Commerce and Adam Posen of the Bank of England, whilst polling conducted by Ipsos-Mori for the report suggests that up to 70% of retail and institutional investors surveyed would be likely to buy the bonds. As I have written previously, this is not a Gordon Brown-style debt concealment con, but a means of releasing private sector wealth to boost the economy.
Of course, there is no silver bullet that will restore growth by itself, and the Eurozone will have a "chilling effect on our economy" (pdf) for a while. In the longer term, the Government should seek to amend the regulatory framework to encourage new competitors to enter the lending market. Extending the incentives available to start-up firms across many other industries would be a natural place to start.
Ultimately there are as many structures for credit easing as there are macroeconomists. But whatever the precise content of George Osborne’s Autumn Statement, the message must be clear: Britain is going to be bold for growth.