Bank Lending and Credit (Businesses)

Chancellor of the Exchequer – in the House of Commons at 2:30 pm on 6th December 2011.

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Photo of Chris Kelly Chris Kelly Conservative, Dudley South 2:30 pm, 6th December 2011

What steps he is taking to reduce the cost of bank lending and credit for businesses.

Photo of George Osborne George Osborne The Chancellor of the Exchequer

In the autumn statement, I announced the launch of measures to help improve the flow of credit to businesses. We expanded the enterprise finance guarantee scheme within the constraints of state aid rules, but that was not enough, so we have committed to a programme of credit easing as well, using the low interest rates at which the Government can borrow to help get low interest rates to businesses. The national loan guarantee scheme will lead to a reduction in the cost of bank loans for small businesses, while the business finance partnership will deliver additional finance for mid-sized business through non-bank lending channels.

Photo of Chris Kelly Chris Kelly Conservative, Dudley South

I thank my right hon. Friend for that answer. Can he confirm that guarantees under the Government’s national loan guarantee scheme are contingent liabilities, and so will have no effect on the country’s balance sheet or deficit?

Photo of George Osborne George Osborne The Chancellor of the Exchequer

My hon. Friend is right that the national loan guarantee scheme does not add to the debt or deficit; the guarantees are contingent liabilities. The previous Government had a contingent liability scheme for lending between banks, but this is a contingent liability scheme for lending by banks to small businesses. We are following the model of the European Investment Bank, which has a small programme to lend to smaller businesses in Britain. We are using that model to try to reduce interest costs for small businesses, using the credibility of the low interest rates at which we can borrow to deliver those low interest rates to businesses.

Photo of Geoffrey Robinson Geoffrey Robinson Labour, Coventry North West

Given the urgency of getting credit flowing to small and medium-sized companies again, when does the Chancellor realistically expect the first loans to be made under the new arrangements?

Photo of George Osborne George Osborne The Chancellor of the Exchequer

We hope to get the scheme up and running early in the new year. We have to get state aid clearance, which is the rule that we and every other member state of the European Union have to abide by, but by following the European Investment Bank scheme quite closely, which of course is permissible, we hope to get that state aid clearance as quickly as possible and get the scheme up and running early in the new year. I do not need to be reminded of the urgency of getting help to smaller businesses, particularly as bank credit conditions tighten.

Photo of Andrew Tyrie Andrew Tyrie Chair, Treasury Sub-Committee, Chair, Treasury Committee, Chair, Treasury Committee

The major banks argue that they cannot be expected to strengthen their balance sheets and increase net lending at the same time. Does the Chancellor agree with the Governor of the Bank of England that that could be achieved if banks were prepared to cut their bonuses and dividends? In particular, is it not time that shareholders stepped up to the plate and ensured that banks behaved responsibly on the matter?

Photo of George Osborne George Osborne The Chancellor of the Exchequer

The Financial Policy Committee, which is the body that we have established in the Bank of England to provide advice on issues that affect the whole financial system, is absolutely right to say to banks that they should be using any earnings that they have to strengthen their balance sheets if necessary, rather than distributing them in larger bonuses. We need stronger banks, not larger bonuses, this winter. The advice from the Bank of England is very clear, and I would expect the banking system to follow that advice.

When it comes to shareholders, it is particularly good news that the Association of British Insurers has said this morning that it expects to see restraint in financial sector pay. We have to ensure that our banks are prepared for whatever is thrown at them in the coming months, and that they do not pay the large bonuses that used to be paid out.

[Interruption.]

They were paid out when people like Chris Leslie supported the Government.

Photo of Stewart Hosie Stewart Hosie SNP Chief Whip, SNP Deputy Leader, Shadow SNP Spokesperson (Treasury)

Bank lending funds business investment, so I welcome some of the measures that the Chancellor has announced. However, if the lack of lending is a consequence not of availability or cost but of reduced aggregate demand, and if business investment continues to fall or be sluggish, is he not at all concerned about the fact that the vast majority of next year’s gross domestic product growth—0.7%—will be driven by business investment? Should that happen, where would it leave his growth forecasts?

Photo of George Osborne George Osborne The Chancellor of the Exchequer

Of course, the components of our GDP forecast, like the forecast itself, are produced by an independent body, the Office for Budget Responsibility, so it is not my assessment of business investment next year but the OBR’s. I am confident that if we invest in the infrastructure that we set out last week, provide support for seed investment through the enterprise investment scheme that we have created and make it easier to hire people, as we propose to do, we will encourage business to invest, grow and take people on.