Government’s small firms bank will need state cash

Business Secretary Vince Cable’s plan for a Government-backed bank to increase lending to small businesses will need £40bn of state funding to make it a success.

The IPPR think tank also yesterday said the bank must also be free to raise as much as £100bn on the capital markets to top up the taxpayer-funded investment. It also urged the Government to allow the institution to plough money into infrastructure projects to boost the economy.

Mr Cable last week announced plans for a government-backed bank to increase lending to small businesses, admitting that the details were still in “gestation” but “may” involve some state lending, something the Treasury is understood to be against.

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IPPR chief economist Tony Dolphin said: “Because the Chancellor will not spend more government money boosting aggregate demand in the economy, he has been reduced to indirect schemes like funding for lending to support growth.

“These require shifts in behaviour by the banks and pension schemes if they are to work and consequently are not as effective as more direct approaches. There is a danger that Vince Cable’s idea for a new bank will also have less impact on the economy than it could.

“What we need in the UK is a fully-fledged British investment bank designed to suit the particular circumstances of our economy.

“We urgently need infrastructure investment and financing for small and medium-sized businesses. A British investment bank could tackle these long-standing weaknesses in our economy. Such a bank would require an initial injection of government capital which – on the existing accounting rules – would make it even less likely that the Chancellor would meet his fiscal targets.

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“A fully-fledged British investment bank should not be held back by the vagaries of the UK’s accounting practices. Its self-financing activities should be excluded from the Government’s target fiscal measures and it should be free to raise funds on capital markets.”

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