Chancellor trumpets loan scheme as boost to struggling economy

An £80bn initiative to re-energise bank lending came into effect yesterday in the latest attempt to boost the struggling economy.

The Bank of England and Treasury’s Funding for Lending scheme (FLS) makes money available to banks on the condition they pass it on to businesses and households in the form of cheaper loans and mortgages.

As banks face a worrying phase in the credit crisis, Chancellor George Osborne said the scheme would help ease credit conditions throughout the economy.

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But he confirmed that the scheme would ultimately supersede the £20bn National Loan Guarantee Scheme, known as credit easing, which was unveiled in March as a flagship policy to boost lending to businesses.

The Chancellor said the credit easing scheme had “made a real difference” by offering more than 16,000 cheaper loans worth more than £2.5bn to businesses across the UK and would be kept going in case it was required again.

He said: “In many cases, the money saved has meant an extra person employed who otherwise still might be looking for work.

“The more generous FLS has officially opened for business and will in time effectively take over from the NLGS, delivering credit easing to the whole economy.”

Labour claimed that would be a further blow to Chancellor George Osborne after he announced in June that the scheme was to be extended to allow larger businesses to take part.

Shadow Treasury Minister Chris Leslie said: “If the National Loan Guarantee Scheme was always supposed to be replaced by the new Funding for Lending scheme, then why, two weeks after that new scheme was announced, did George Osborne say that the NLGS would be extended?”

The latest initiative comes as the UK is mired in the longest double-dip recession in more than 50 years, with the Chancellor facing criticism that his austerity measures are damaging the economy.

Worsening conditions in the eurozone are making it harder and more expensive for banks to borrow, while they have also been hoarding cash to shore up their balance sheets in the face of economic woes.

The Bank and Treasury hope the funding for lending initiative will provide the incentive needed to release funding for banks and support the economy by easing the flow of credit to households and businesses.