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credit easing

Colin Borland

Colin Borland

By Colin Borland

For about a week now, every day has brought another reminder that, if not unprecedented, these are exceptional economic times.

We’ve had predictions that real household incomes are set to fall by over 7 per cent compared to a few years ago. The world’s major central banks have clubbed together to shore up the global financial system. And, regardless of whether you regard it as a damp squib or a resounding success, we saw the largest strike for decades over changes to public sector workers’ pensions.

So, against all this, will the measures the chancellor George Osborne announced (or, rather, confirmed) in his autumn statement make any difference?

The top line for many small businesses will be the moves to increase access to – and lower the cost of – finance. Enhanced tax breaks to encourage investment in start-ups will be most welcome for the specific businesses which are attractive to private equity investors. But this specialised solution will not be for the majority of small businesses in need of investment.

More joy may be found with “credit easing”, whereby the government will underwrite up to £40 billion in lower-interest loans to firms. We all get frustrated when we see historically low Bank of England base rates which bear no relation to the rates we get offered, so the idea of passing on these savings is a commendable one.

But will it deliver? Some small firms will roll their eyes when they discover the banks will be the scheme’s gatekeepers. And how do we avoid this public money simply subsidising loans which would have been granted at a certain rate anyway? To work, this underwriting must become the bridge between the business community’s definition of a good investment and that of the banks. Subsidising a few dead certs will not have the desired outcome.

With many businesses having no option but to use a vehicle on a daily basis – and every penny spent at the pump is not being spent elsewhere in the economy – it’s no surprise that the chancellor was also under pressure to act on the cost of fuel. The cancellation of next year’s proposed fuel duty increase of course has to be welcomed. However, not imposing an extra future increase will not fill those already struggling to pay at the pumps with a huge amount of confidence. Devising a fiscally neutral method of offsetting rises in oil prices and against duty rates should not be beyond us.

On the new funding for infrastructure projects, of which the Scottish government will get its share, this cannot simply be handed to multinationals with the expectation it will magically trickle down to the rest of the economy. We need to ensure local businesses win contracts directly and that subcontractors are treated – and paid – fairly.

If the autumn statement is to prove a shot in the arm rather than an economic placebo, these initiatives must be delivered in a way which maximises their benefit – and that means ensuring they reach the small businesses which will rebuild our economic base and drive the recovery.

Colin Borland is head of external affairs for the Federation of Small Businesses in Scotland

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<em>Picture: tompagenet</em>

Picture: tompagenet

There has been a very mixed response to today’s autumn statement by the chancellor of the exchequer.

As expected, George Osborne confirmed that growth would be lower than previously predicted, while borrowing and unemployment would also be higher than forecast in his budget in March.

He blamed the eurozone crisis, the rise in global commodity prices and a reassessment of the UK’s economic boom and bust which were bigger and deeper than previously believed.

Mr Osborne said that the public sector would bear the brunt of coping with the new situation. Public sector pay rises would be capped at 1 per cent for two years once the current pay freeze ends in 2013. The number of public sector jobs likely to be lost over the coming five years is higher than expected. Instead of 400,000, the figure now stands at 710,000.

However, Mr Osborne confirmed that £40 billion of “credit easing” would be made available to underwrite bank loans to small firms. He announced details of a £5bn plan to improve infrastructure in England over the coming three years, with £25bn more planned for future years. There was also confirmation that the 3p rise in fuel duty in January will be delayed or frozen.

“Given the dire state of the public finances, said the CBI Scotland’s assistant director, David Lonsdale, in a preliminary response, “and with key overseas markets particularly in Europe still in a funk, this was always going to prove a difficult backdrop to the chancellor’s statement.

“He is right to continue to pursue a tough programme of fiscal consolidation in order to eliminate the public spending deficit, a necessary precursor if he is to halt let alone reverse the ballooning national debt and higher interest payments that come with it. The chancellor’s statement did also contain a number of welcome announcements for businesses – help to reduce the cost of growth capital and make investing in start-ups more attractive, reductions in energy bills for heavy industry, and an extension of the R&D [research and development] tax credit.”

The CBI wants the Scottish government to clarify whether it will allow firms operating in Scotland to defer a portion of the rise in business rates bills expected to come into effect next April.

In its comment, the STUC said that the statement revealed the true extent of the unfolding disaster that is the coalition’s economic policy. STUC general secretary, Grahame Smith, said that the chancellor’s programme “is failing on its own terms as forecasts for borrowing increase significantly; by more than £100bn on the March budget forecasts.

“Measures announced today on infrastructure investment and credit easing are much too weak to avoid an extended period of economic stagnation and high unemployment; the inevitable consequence of a dangerously irresponsible and ideologically motivated austerity programme.

“As usual, the chancellor was unable to hide his contempt for ordinary workers. Public sector workers will suffer at least another couple of years of falling real incomes and potentially more as the chancellor seeks to undermine established collective bargaining processes. The meagre employment and health and safety protections afforded to UK workers will be further diluted.”

Gareth Williams, head of policy at the Scottish Council for Development and Industry, pointed to the slowing economy, falling global confidence and higher than anticipated borrowing, and argued that the government had to prioritise new stimulus for growth. “We have been calling for increased capital investment,” he said, “and hope that the Scottish government will be able accelerate shovel-ready transport, housing and – rolling out today’s announcement for Edinburgh – super-fast broadband projects.”

The Federation of Small Businesses in Scotland was pleased that much of the chancellor’s rhetoric suggested he understands many of the issues holding back the Scottish small business community. However, its Scottish policy convenor, Andy Willox OBE, said “it remains to be seen if any of the individual measures announced today will effectively tackle the problems that have been identified as barriers to economic growth.”

Mr Willox was pleased by the proposed fuel duty increase, and said that every penny spent on fuel is money not spent elsewhere in the economy. “This measure has to be welcomed. However, cancelling a proposed increase will hardly fill with confidence businesses and families struggling to pay at the pumps at the moment.”

However, he was less complimentary when it came to the details of the credit easing scheme. “Some small firms,” he said, “will roll their eyes when they discover the banks will continue to be gatekeepers for much of this state-backed lending. The government must therefore go further to promote the emergence of alternative forms of finance and greater competition in the banking sector.”

Although the chancellor announced an expansion in spending on infrastructure, that came as little comfort to the Scottish Building Federation. Its chief executive, Michael Levack, pointed out that it coincided with new statistics showing the number of new homes built in Scotland fell by 12 per cent between April and June this year compared to the second quarter of 2010.

“Last week,” he said, “leading industry bodies set out a clear plan to unlock growth in the UK construction industry. While the chancellor’s statement puts forward interesting plans to boost capital investment in certain areas, there are other important priorities highlighted by the industry which have been ignored – not least our ongoing request for a targeted cut in VAT on home improvements to kick-start job opportunities in the industry and green our built environment.”

That view was shared by Ed Monaghan, CEO of house builders Mactaggart & Mickel, who said that “the government’s commitment to ‘getting Britain building’ acknowledges the fundamental role the housing and construction industry plays in the wider economy acting as a catalyst to other goods and service sectors.

“More than ever, British businesses have to be supported for growth and any practical action the government can take to do so, such as improving availability of funding through credit easing, should be both encouraged and utilised. Supporting growth will increase tax revenues and thus help reduce the deficit, doing nothing is no longer an option.”

Both hoped that the Scottish government would take the opportunity to prioritise any additional funding for capital projects released through the Barnett Formula to kick-start projects that are ready to start but are currently stalled due to a lack of bank finance. They were joined in welcoming the new emphasis on infrastructure by the Scottish Federation of Housing Associations.

It urged the Scottish government to boost funds available for new-build affordable housing this year, using the extra funding made available to Scotland as a result of funding announcements contained in today’s statement. Its CEO, Dr Mary Taylor, said that building affordable housing provided a unique boost to jobs and struggling local economies, as well as tackling housing need.

“We urge the Scottish government,” she said, “in the wake of the autumn statement, to reverse the 30 per cent cut to this year’s affordable housing budget. This would avoid the prospect of the number of new homes further plummeting, with construction activity and all the associated benefits stalling in communities across Scotland. Our message to the Scottish government is, build homes, stimulate growth.”

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George Osborne MP, chancellor of the exchequer <em>Picture: altogetherfool</em>

George Osborne MP, chancellor of the exchequer Picture: altogetherfool

The chancellor’s autumn statement is a time for the government to take stock. It provides a chance to tell parliament and the country about the state of the economy, to explain any changes of direction and to announce any initiatives. This Tuesday, George Osborne will be under more scrutiny than usual.

There are usually few surprises in the speech. Unlike the budget, there aren’t quite the same restrictions on offering hints about what the chancellor might say. Over the past few days and weeks, we have had a reasonable amount of information, trailing the kind of ideas that could be in Mr Osborne’s mind. There is also no shortage of advice.

Take, for example, the ITEM Club. Run by Ernst & Young, it is the only economic forecasting group which uses the same model of the economy used by the Treasury. That makes its projections all the more interesting – and the latest to be released will make worrying reading for the coalition’s supporters.

It warns that the crisis in the eurozone, along with high inflation and low wage growth, means that the government’s growth forecasts on Tuesday will have to be cut, quite substantially. It says that the UK economy will only grow by 0.9 per cent this year, down from the original forecast of 1.7 per cent. As for 2012, growth will drop from 2.5 per cent to just 1 per cent.

ITEM also argues that the Office for Budget Responsibility (OBR) has been too optimistic when it comes to public sector jobs. It suggests that, instead of 400,000 jobs being cut, the real target will have to be closer to 500,000. That will not be good news at a time when the government is facing a public sector rebellion over pension reform.

On the positive side, however, there should be some good news for business. Firms large and small have been waiting to find out what the chancellor meant when he talked of “credit easing” earlier in the year. It seems that he will reveal all by announcing three schemes to release £40 billion in loans to small firms.

One would be a kind of credit guarantee scheme. The government would put a guarantee behind the banks which would then borrow on the financial markets. They would then have to pass on those cheaper lending rates to small and medium-sized companies. The indications are that this would apply to firms turning over less than £50 million.

Another smaller scheme will mean that the government takes a stake in an investment fund along with private sector investors. This fund will then provide a source of credit or loans to medium-sized companies. Finally, there is a plan aimed at larger firms which would be able to sell bonds – business IOUs – to the market as an alternative to using traditional banking.

Ministers believe these new programmes would be in place by the start of the new year, running for the next two years. In the figures already in the open, a company could save some £50,000 a year on a £5m loan as a result of paying a typical interest rate of 4 per cent instead the commercial 5 per cent. A Treasury source told the Press Association that this was a “game changer”.

However, shadow chancellor Ed Balls and shadow business secretary Chuka Umunna have written to Mr Osborne, suggesting that this wouldn’t be enough to revive economic growth. Their letter pointed out that “over 1,200 people a day are entering unemployment. Businesses are going bankrupt at a faster rate than a year ago – despite your expressed wish for a private sector-led recovery.”

There will be other measures to ease what has now become known as the “squeezed middle”. For instance, the chancellor is expected to announce changes to the way rail tickets are priced. At the moment, there is a formula which would have seen prices rise by more than 8 per cent from January. It is now believed that the rise will be cut to around 6 per cent.

Mr Osborne is also expected to confirm a freeze or delay in the planned rise in fuel duty, which again would have come into effect in the new year. Motoring groups feared that the 5p a litre rise, when added to the annual inflation-linked increase in duty later in the year, would see the cost of petrol rise by 8p a litre from the summer.

Despite these positive reforms, the statement is likely to be overshadowed by further grim news on the economy. As well as the lower forecasts from the OBR, the Organisation for Economic Co-operation and Development is expected to predict that, from the start of 2012, the UK will see two successive quarters of negative growth putting us back in recession.

And speaking on Radio 4’s The World This Weekend, President Obama’s former chief economic adviser, Austan Goolsbee, was asked about the UK’s austerity programme. “If you’re going to do serious damage to the growth prospects of your country,” he warned, “the market is going to punish you not reward you for doing that kind of thing. If everything goes south [in the eurozone], being in a heavy austerity mode is not going to be a fun place to be.”

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George Osborne, chancellor of the exchequer <em>Picture: altogetherfool</em>

George Osborne, chancellor of the exchequer Picture: altogetherfool

A report from the European Commission’s statistical office, Eurostat, shows how the economic crisis has hurt business, and small and medium sized enterprises (SMEs) in particular. The report confirms what a lot of smaller firms have been saying: that the proportion of unsuccessful loan applications has risen over the past few years.

The Eurostat report says that the economic crisis has made it more difficult for SMEs to access banking credit, with the proportion of unsuccessful loan applications rising between 2007 and 2010 in 19 of the 20 European Union member states for which data are available.

In 2010, the UK ranked quite high in the league table: 21 per cent of all applications for business loans here were unsuccessful, the same as Lithuania. Only Bulgaria (36 per cent), Ireland (27 per cent), Latvia (26 per cent) and the Netherlands (23 per cent) were worse.

Eurostat surveyed 25,000 businesses across the EU, gathering information on fast-growing enterprises, the future financing needs of SMEs and perceived factors limiting business growth in the future.

“We genuinely hate to say ‘we told you so’,” said Colin Borland, head of external affairs in Scotland for the Federation of Small Businesses, “but these worrying statistics underline the case the FSB has been making since the credit crunch hit.

“It wouldn’t be fair to say that no bank is lending to any small business. But what is clear is that fewer businesses are going to their banks – and, when they do, it’s less likely they’ll get the finance they need. It’s also more likely that any finance will be less flexible, more expensive and come with more strings.”

Most of the Scottish banks have so far failed to respond to a request for their view of the report’s findings. But a Lloyds Banking Group spokesman said that it was “committed to supporting the Scottish economy and we approve eight out of ten requests for loans and overdrafts.

“Last year we provided £500 million of lending provided to Scottish small and medium sized businesses and these lending taps remain open while the absolute cost of borrowing is around half that in 2007. We are giving real support to businesses across Scotland allowing them to create new jobs and keep the economy moving.”

The report came on the day that the UK chancellor, George Osborne, told the Conservative Party conference in Manchester that the Treasury would look at ways of funnelling money directly to British companies. The idea, which has still to be spelt out in detail, will involve the government or the Bank of England issuing new kind of bond for business or underwriting loans to small businesses who are struggling to get credit now.

“Everyone knows Britain’s small firms are struggling to get credit,” the chancellor said, “and banks are weak. So as part of my determination to get the economy moving I have set the Treasury to work on ways to inject money directly into parts of the economy that need it, such as small businesses. It’s known as credit easing.

“It’s another form of monetary activism. It’s similar to the National Loan Guarantee Scheme we talked about in opposition. It could help prevent another credit crunch, provide a real boost to British business, and over time help solve that age old problem in Britain: not enough long-term investment in small business and enterprise.”

The FSB welcomed the initiative, with Colin Borland wishing it every success and adding that he looked forward to the detail. “We also welcome many of the Independent Commission on Banking recommendations [published last month], recognising we can never again see a cataclysmic banking collapse that drags the real economy into the mire. However, I am certainly unconvinced that we have put together a comprehensive plan to tackle the whole problem – especially in Scotland where two banks are dangerously close to running a duopoly.”

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