Comment: Lending scheme falters over banks’ dilemma

Martin Flanagan
Martin Flanagan
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WHAT goes around comes around, certainly with regard to lending to small businesses. Apparently the Funding for Lending Scheme (FLS), launched with fanfare by the Bank of England and Treasury last summer, has failed to build up a head of steam and needs to be “put on steroids” to have an impact.

Its unofficial predecessor, Project Merlin, a hazy social contract between the coalition government and Britain’s banks on business lending, also failed to weave any magic spell before disappearing in a puff of smoke.

To be fair to Funding for Lending, which gives banks cheap money as long as it is recycled into businesses and households, the scheme has boosted mortgage lending.

But even that has been mainly improvements at the margin, rather than a housing market game-changer. And, without evidence of FLS also stimulating small and medium-sized (SME) business lending and thereby helping the flatlined economy, people will dismiss it as ineffective.

Now it seems the government realises this, and wants to skew the scheme far more towards small business lending following a slump in business credit in the final quarter of 2012. However, there are two challenges. Firstly, despite political soundings off, there are no practical, specific measures on the table to make FLS more credible.

Secondly, and perhaps more importantly, you can lead an SME to water, but you can’t make it drink. As a procession of banking chief executives have repeatedly told meetings of both the banking commission and Treasury select committee, small businesses are deleveraging.

Many of them, uncertain of what the economic future holds, just don’t want extra credit. Stephen Hester, chief executive of Royal Bank of Scotland, has told MPs publicly that it is a healthy and logical attitude that many small businesses and households are taking in cutting debt after the previous credit-fuelled bubble.

However, that is not what policymakers want to hear as the UK’s recovery stutters along. And so a disconnect has developed between what has so far proved the FLS’s rainbow-chasing of greater SME lending and inconveniently thin business appetite on the ground.

Why should this suddenly change? Political soundbites, devoid of specifics, fill the vacuum.

Prepare for a steady, not spectacular, Budget

Some would like fireworks from George Osborne’s Budget next week (not unconnected with the problems dicussed above). But the Chancellor looks to have little room for manoeuvre.

For instance, I sense the CBI is not holding its breath for any further 
reduction in corporation tax following Osborne cutting it to 24 per cent, and a promise of 21 per cent next year.

There was no call for such a move in the CBI’s relatively bland pre-Budget submission on Monday. It is more likely that the Chancellor delivers a steady-as-she-goes production next week, particularly after the recent loss of Britain’s talismanic triple-A credit rating.

With economic recovery looking firmer in the US, more positive noises out of China, and eurozone pressures seen as diminishing, Osborne might think a fiscally neutral, “modest” Budget is the right ticket at this stage, while hoping an improving macro climate allows Britain to muddle through two years off the next general election.