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STRIDE Mel

Mel Stride is PPS to John Hayes MP, founder of the Deep Blue group of centre-right 2010 Conservative MPs and MP for Central Devon.

2013 may well go down in history as 1981, part two: the year a determined Chancellor again proved much apparent economic wisdom wrong. By sticking to his guns, and to plan A, George Osborne has ensured that the economy has turned the corner. Indeed, the flurry of growth upgrades (the IMF’s this week being a particularly gratifying example) point to 2014 perhaps even seeing the UK economy growing at the fastest rate of any country in the G10.

Business confidence is surging, which in turn will drive investment through levering out chunks of the £750 billion cash mountain piled up in UK corporate accounts. In the face of so much good news, it may appear churlish for the Chancellor to insist that the recovery is fragile. But he is right: this New Year brings new challenges.

Bank credit availability continues to present a mixed picture with SMEs, in particular, their finding bank credit difficult to access – a problem compounded by an inability to tap equity markets as an alternative. A survey this month by the British Chambers of Commerce, for example, found that a lack of access to credit is specifically restricting their investment in new plant and machinery.

This situation presents a number of serious potential consequences. Firstly, the pursuit of balanced growth – built on an appropriate geographic spread of investment and exports rather than consumer demand fueled by personal debt and house price inflation – is hindered by significant restrictions on business credit. Secondly, slower SME development restrains a part of economy that is especially vital to innovation, supply chain development and the creation of tomorrow’s global businesses. And, thirdly, a lack of business investment holds back productivity, job creation and improved real wages. This latter point is, of course, of the utmost political importance given that George Osborne’s comprehensive trouncing of Ed Balls on the macroeconomic arguments have left Labour now heavily (I would argue too heavily) invested in winning the standard of living debate.

The Government has not been slow to respond positively to the problem. In fact, there have been a number of important initiatives: from the Merlin voluntary agreement, to the National Loan Guarantee Scheme and Funding for Lending. Although these initiatives have been more than welcome, improving conditions has been “an uphill struggle”, as the Business Secretary recently told the BIS Select Committee, particularly as the banks themselves have been deleveraging and restoring their own capital.

In addition to these challenges, SMEs also face the prospect of the era of very cheap money coming to an end just as it might be hoped that it would start to accelerate its extension even further beyond the banks lending to each other. That end may come two years earlier than the MPC originally anticipated with Mark Carney’s seven per cent unemployment trigger probably due to be reached this year – although the trigger now looks to be redefined. When it comes, tapering and, ultimately, higher interest rates would make conditions more difficult for business investment, not least SMEs.

In truth, the banking crisis has exposed a long-term structural problem in UK business finance that has long made it difficult for even the most promising businesses to grow beyond a certain point, leaving them ripe for takeover by larger competitors. In his New Year message, John Longworth, Director General of the BCC, majored on this point arguing that there is a need for a “national incubator” for those SMEs that have reached the stage in their growth cycle where they have the potential to become the national champions of the future.

The new British Business Bank, launched last October, could well provide a powerful impetus to the creation of such a national incubator. Prior to its establishment, the UK was the only G8 country without an economic development bank.  The new bank is modeled on Germany’s KfW, the post-war bank of reconstruction which has more recently been credited with sustaining the ‘Mittelstand’ – the network of midsized companies that have bolstered Germany’s resilience during the economic crisis.

The new Business Bank is inevitably a long way from matching KfW’s financial muscle. The British bank has £1.2 billion in core funding in addition to £2.9 billion of capital from existing government schemes. By contrast, KfW has total assets of 476 billion euros and, in the first nine months of 2013 alone, it lent a fresh 17.3 billion euros to the Mittlestand.

As the era of cheap money inevitably comes to an end, the Bank of England should consider a more radical approach to target funds where they are most needed and will do most to sustain the recovery. The Funding to Lending scheme uses public money to make cheap loans available to the banks if they will lend to small business. But persuasion doesn’t always work, particularly as banks have to respond to other pressures. It would make sense to consider ways of facilitating credit for the British Business Bank whose raison d’être is business lending. KfW raises money through bonds guaranteed by the German federal government, enabling it to raise funds on advantageous conditions. It is also exempt from corporate taxes helping it to make loans at lower rates. If  similar advantages were extended to the British Business Bank it could grow more rapidly, potentially reaching a similar scale to KfW – helping to build a British Mittelstand of even more successful SMEs and so contributing, through them, to a more robust and balanced economy.

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