UK Politics

Osborne backing up to £40bn in 'credit easing' loans

  • 27 November 2011
  • From the section UK Politics
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Chancellor George Osborne will unveil credit easing schemes to release up to £40bn in loans to small firms when he delivers Tuesday's autumn statement.

Under one plan, the government would underwrite banks' borrowing so they could pass on cheaper loans to firms turning over less than £50m.

Loans of £20bn will be involved initially but this could be doubled.

Shadow chancellor Ed Balls commented that access to credit alone would not restore business confidence.

Mr Osborne is proposing three schemes in an attempt to boost economic growth.

The first scheme would see the government provide a guarantee for banks to borrow on the financial markets.

"The government will underwrite the loans the banks make to small businesses in order to cut the interest rates the small businesses pay," the chancellor told BBC One's Andrew Marr Show.

"We are making available £20bn for the National Loan Guarantee Scheme; however, it sits within an envelope that could be as large as £40bn," he said.

"These are guarantees. We are not borrowing this money; we are underwriting the loans that are being made".

It is understood that the second £20bn of loan guarantees are being held in reserve for the moment but could be made available in the next two years.

'Game changer'

Ed Balls welcomed the announcement on credit easing in principle, but said he needed to see the details.

"If there is a credit easing plan, that will be a good thing. It should have been done earlier," he told Andrew Marr.

"We will look at the details, but I think it is very similar to the small firms guarantee scheme which has been around for years."

The chancellor will also propose that the government takes a stake in an investment fund with private sector investors to provide a source of credit or loans to medium-sized companies.

A third scheme would offer an alternative to traditional bank loans by encouraging firms to sell bonds - or company IOUs - to the market.

A Treasury source told the Press Association the schemes were a "game changer".

It would mean that a firm currently taking out a £5m loan at a typical interest rate of 5% would instead be able to borrow at 4%, saving £50,000 a year in interest payments.

Ministers hope it will be in operation by the start of the new year, and it is envisaged it will run for the next two years.

The Chancellor also appeared to acknowledge that the independent Office for Budget Responsibility (OBR) will downgrade its predictions for economic growth when it publishes its latest forecasts on Tuesday.

"This is an exceptionally difficult time. We have a slowing economy, a slowing world economy, we have this financial crisis brewing in the Europe," he said.

In March the OBR forecast growth of 1.7%, down from 2.6% it had predicted in June 2010.

Now most economic commentators predict that the UK will be lucky to hit 1% growth in 2011.

Image caption Financial planning is harder for smaller firms, says businesswoman Laura Tenison

Businesswoman Laura Tenison, founder of children's clothes store JoJo Maman Bebe, said banks should be happy to keep lending to small firms that understood good financial planning.

"I know what it's like to run a small business - I know when you're so busy dealing with everyday problems, you don't have time to cash-manage in the way that a slightly bigger business can," she said.

"But, if you do plan for the future, very carefully, then you can see yourself through the peaks and troughs of the economic cycle."

She added that in her experience, banks would support businesses that prepare, but added "I'm sure there are many cases where they feel that they've been let down".

In a joint letter to Mr Osborne, Ed Balls and shadow business secretary Chuka Umunna warned that the credit easing alone would not be enough to revive economic growth.

"At the current rate, over 1,200 people a day are entering unemployment," said the letter.

"Businesses are going bankrupt at a faster rate than a year ago - despite your expressed wish for a private sector-led recovery.

"Access to credit will not in itself restore the confidence of business to invest. The country urgently needs a plan for growth and jobs."

Mr Osborne is also due to announce a cap on rises for regulated rail fares, such as peak fares and season tickets.

A planned rise of 8.2% - RPI inflation of 5.2% +3% - will be restricted to 6.2% (RPI +1%), with the cap also covering bus and Tube fares in London.

The Treasury said its credit easing plan would not add to the country's deficit, according to BBC political correspondent Carole Walker.

Our correspondent said: "They are sticking to that deficit reduction plan, but I think the chancellor does still face a lot of questions about how he is going to pay for things like those lower-than-expected rail fares, and that plan to tackle youth unemployment that we heard about."

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