Budget Response: Nothing to See Here, Move On!

Today’s budget does not include any major changes to the banking system in the UK. Although the Bank Levy has been increased by 0.003% (from 0.075% to 0.078%), this will be offset by a 2% reduction in corporation tax rate this year (from 28% to 26%), with further reductions in the following years. The treasury claims the two changes will cancel each other out. However, the plans announced in the June 2010 budget to make corporations exempt from tax on their foreign branch earnings will lead to a massive reduction in the tax on banks. Indeed, the government says it expects “large financial services companies to make the greatest use of the exemption regime”.

The budget also repeated an announcement from last month that the five largest banks operating in the UK agreed to make £190 billion of new credit available to business this year. Of this £76 billion would go to small and medium sized enterprises (SMEs), an increase of £10 billion on last year. Although this sounds good in theory, it is not legally binding. As Tony Greenham of the New Economics Foundation put it. “Politely asking the big national banks to support SMEs has as much chance of success as politely asking them to cut their bonuses”.

However, the Government does hold some power over RBS and Lloyds, and both exceeded their commitments to business and mortgage lending. Whilst this is good news for small businesses, the long term problems remain unaddressed. By definition,  an economic recovery financed by borrowing must lead to ever greater amounts of debt.

Yet it doesn’t have to be like this. There is no need for money to be created by private banks as debt. The recovery could be financed by the Government creating debt free money and spending it into the economy (under strict constraints, of course).

At the moment three quarters of the money created by banks go into the commercial and property markets – much of it speculative. What would the UK look like if the money had been spent on hospitals, education, reducing poverty, high speed rail or reducing the tax burden on business instead?