Piotr Brzezinski is a JD / MBA student at Yale University and the former Head of Digital Government at Policy Exchange
Only a few weeks after Nick Clegg’s ‘No Plan B’ conference speech, it has become abundantly clear that there is, in fact, a Plan B. Without wavering from its commitment to deficit reduction, the government has recalibrated across the board; witness Plan B:
- No new tax cuts: The longstanding assumption has been that the government, having cut spending in its early years, would cut taxes before the next election. George Osborne’s pre-conference interview, however, emphatically ruled out any such pre-election tax cuts.
- Credit easing: Details remain to be revealed, but the premise of credit easing is clear: the government will enable loans to the private sector and retain assets as collateral so that, by feat of accounting magic, increasing lending now doesn’t add to the state deficit.
- More QE from the Bank: Just after the conference ended, the Bank of England announced another round of quantitative easing to goose demand and protect banks.
- Go-slow green regulation: As others have noted, the Chancellor’s speech also marked a clear change of emphasis on environmental regulation—no longer does the government seem to promise ‘green at any cost’ policy.
- More aggressive deregulation: Lord Young has returned to reinvigorate a deregulation drive that—planning and localism reforms aside—risked stalling; plans to limit industrial tribunals are hopefully a sign of things to come.
Undoubtedly there will be more to come in Osborne’s November growth statement but it is already clear that the government has adjusted course after Plan A. It is easy to blame the Eurozone crisis for the economy’s limp performance, or the cuts themselves, but the truth is that a period of slow growth may be inevitable: Post-financial crisis recoveries typically take 7-10 years. Bank deleveraging takes time and, until lenders repair their balance sheets, lack of credit sucks the life out of the economy. (Hence Simon Nixon’s description of Basel III as ‘Doom Loop’—tighter capital requirements are the right idea, wrong time.)
That’s what makes credit easing the most interesting element of Plan B. Banks have to curtailed lending because of extra-ordinary demands on their capital, and so the government has decided to step-in and help fill the gap. If the government hits the sweet-spot of lending to businesses that are credit worthy but can’t get access to loans due to bank deleveraging, it could generate meaningful growth. The catch, as always, is how the government will differentiate between good investments—those that would have been made but for the need for banks to bolster their balance sheets—and bad investments unable to get market loans for good reason.
The scheme also appears deficit neutral, as collateral will balance out loans. But if the Government receives sub-prime collateral, the state will have to absorb the loss. It’s worth noting that America’s small business loan program, which is allegedly a model for credit easing, suffered a 17% default rate and 2.4% losses (i.e., collateral insufficient to cover defaults) from 2000-09.