Labour lines up £20bn business loan guarantee

Tuesday, 13 January 2009 12:27

The government is set announce a small business loans scheme, with loans of up to £1 million for small and medium-sized companies being underwritten by the taxpayer.

Under the scheme to be announced by Peter Mandelson as much as £20 billion worth of loans could be underwritten by the government.

However, the Conservatives claims the government has stolen their idea despite repeatedly ridiculing it.

"We have been calling on Gordon Brown to introduce a national loan guarantee scheme for two months and while the prime minister has dithered dozens of businesses and thousands of jobs have been lost," Geroge Osborne, Tory shadow chancellor, said this morning.

"Let us hope that they will properly implement this Conservative policy rather than a pale imitation, or else they run the risk of repeating the mistakes of their expensive temporary VAT cut and achieving nothing."

The Labour plan is an extension of a scheme in the Pre-Budget Report, in which chancellor Alistair Darling promised £1 billion to encourage bank lending.

Government sources indicate the government plan will be less focussed on general guarantees and more towards companies running temporarily short of credit.

But the Liberal Democrats deny the plans are particularly different to the Tory scheme.

"The government's proposal, essentially the same as that of the Conservatives, potentially involves very large taxpayer liabilities and is in effect a subsidy to bank lending," said Vince Cable, the party's economics spokesman.

"We worry that this is another instance of the taxpayer shouldering all of the risks without any of the rewards. It is also an expensive approach when others have not yet been explored."

Mr Cable said the government was sending the banks mixed signals.

"The government seems to lack the bottle to break the banks' lending strike," he said.

"It finds it much easier to use taxpayer-financed guarantees than to get tough on the taxpayers' behalf."

The loan comes as poor economic news is mounting.

A survey by the British Chambers of Commerce (BCC) - which measured activity across almost 6,000 businesses employing over 680,000 people - points to a "frightening deterioration in the UK economic situation".

Every region in the UK reported "disturbing" drops in sales and orders for both the service and manufacturing industries.
Businesses do not expect the situation to get better any time soon. The BCC found an "alarming collapse in confidence" in turnover and profitability, with company chiefs fearing economic recovery will not be quick.

The survey's authors also call for "a further fiscal stimulus and quantitative monetary easing", to supplement the cut in interest rates it successfully predicted would be necessary early in 2009.

Quantitative monetary easing, essentially a modern means of printing money, has been described by many experts as a "high-risk strategy" riddled with economic, practical and political problems, but it has not been ruled out by the Bank of England.

Ian Dunt

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