The National Loan Guarantee Scheme looks set to have a minimal impact on our economy’s major
According to research by Positive Money, only 8% of commercial bank lending in the UK goes to the
productive sector. This can be explained by looking at the incentive structures within these banks,
which arguably lead their decision makers to focus on the accumulation of short-term profits at
the expense of a more socially beneficial business structure. Consequently, in times of stress, they
curtail their less profitable activities, including lending to small and medium enterprises (SMEs). In
fact, bank lending to this sector has fallen 6% in the last year, in spite of considerable government
support and their obligations under Project Merlin. This has led Mervyn King to comment on
the “structural misfunctioning of lenders”, and, given that our economy relies largely on the success
of SMEs for new employment opportunities, long-term competitiveness and improving the trade
deficit, inter alia, it is easy to see where King is coming from.
But why would the Government allow their support to be so callously abused? Banks have used
state funding to engage in unproductive and potentially destabilising speculation, skimming off
billions in profits in the process. Instead, could the state choose to invest directly in the productive
sector? Lord Robert Skidelsky and Tim Jackson have made convincing arguments that this type of
direct government investment could prove pivotal to sustainable economic recoveries in Western
With the Treasury stifling any attempts to establish a functioning Green Investment Bank, the
Government instead seem to be prioritising the stimulation of private lending for mortgages and
SMEs through the establishment of loan guarantee programmes. As part of this strategy, George
Osborne looks set to announce the National Loan Guarantee Scheme in his upcoming budget.
According to Nils Pratley, this is a rebranding of “credit easing”, a policy that, from the start,
aimed to avoid the Treasury making direct loans to SMEs. Under this scheme, the Government will
guarantee £20 billion that banks raise in the market, on the condition that it is lent out to SMEs.
In theory, the guarantee will mean that the banks can borrow at a cheaper rate, which they can
then pass on to these businesses. However, even if this policy does result in slightly lower rates
for SMEs (which, according to the numbers presented by Pratley, will be a derisory 1% lower), it
does not change the fact that a disproportionate amount of the currency supply is being wasted on
unproductive and potentially destabilising activities.
On balance, there seems to be a strong, practical argument in favour of monetary reform, or the
introduction of a publicly funded national investment bank. SMEs and infrastructure simply have not
had enough investment to spur a sustainable recovery. What is more, there is no empirical reason
that the biggest commercial banks should retain the near-monopoly on the supply of credit that
they currently enjoy. The £325 billion created by the Bank of England through quantitative easing
could have helped to train the next generation of skilled workers, putting the UK at the cutting edge of green technology. Instead, successive governments have entrusted the banks with lending to the productive economy, while making a negligible effort to ensure that this actually happens.
The National Loan Guarantee Scheme may have more conditions attached to it than previous
government interventions in private finance had, but it may still be time to consider cutting out the
middle man. Anything less seems likely to be, as the New Economics Foundation have previously put
it, “a triumph of hope over experience”.