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Don’t laugh, says Scot-Buzz editor Bill Jamieson  – this is how it’s supposed to work

A shock £2.4 billion fall in net lending to business through the much-touted Funding for Lending Scheme could tilt the Bank of England to step up monetary stimulus as early as this week.

And it will add to intensifying pressure on chancellor George Osborne to opt for business-boosting measures in his budget on March 20.

It is “now-or-never” for the chancellor given the poor data in the past week on UK manufacturing.

Either this budget genuinely shifts the needle for household and business confidence, or the Cameron-Osborne leadership will come under intensifying attack from Conservative backbenchers fearful that the Eastleigh by-election debacle was no rogue, one-off affair but a portent of mounting voter frustration.

Latest data from the Bank of England show bet lending by banks taking part in the Funding for Lending Scheme fell by £2.4 billion in the fourth quarter of last year, following an increase of just £923 million in the previous quarter.

This is a miserable outcome by any standards and will lend support to those on the Bank of England’s Monetary Policy Committee to step up its Quantitative Easing programme by £25 billion when it meets on Thursday.

The figures deal a particularly dispiriting blow to the small and medium sized business sector which the FLS scheme was specifically designed to bolster. And the lending shortfall will be especially sharply felt in Scotland.

Colin Borland, head of external affairs in Scotland for the Federation of Small Business, pointed out yesterday that in the final three months of last year the three banks which dominate the Scottish small business banking market -  RBS, Lloyds Banking Group and Clydesdale Bank - all reduced their lending to businesses and individuals.

“RBS and Lloyds used Funding for Lending, yet their loan volumes declined. It is difficult”, he said, “to know what the situation would be without the scheme.  But it does look like, as we warned when it was launched, that the scheme may be reducing costs for those who would have been given a loan anyway, without expanding the pool of businesses to whom banks will lend.

"Encouraging entrants into the small business lending market must be the UK government’s priority in the medium term, especially in sectors and geographies underserved by their current institutions.

When the Chancellor delivers his Budget on March 20, we must learn more about the state-backed small business bank and how it will boost Scotland’s real economy.”

The aim of the scheme, introduced last August, was to boost lending to business by some £60 billion over two years. But while the Bank stressed that it would take time for the results to show through, the news of a lending decline will underpin doubts among some MPC members about how effective the scheme is proving to be.

Data released yesterday showed that just 13 lenders used the scheme in the fourth quarter. A total of £9.5 billion was drawn in the final three months of last year while overall lending fell £2.45 billion, the Bank said.

Of the 13 who drew down FLS funds, ten increased their lending but this was more than offset by massive withdrawals by Royal Bank of Scotland, Lloyds Banking Group and Santander.

The figures will add to the pressure on Osborne for a business package in the budget that will encourage business investment.  Last year’s budget ended in disarray and previous enterprise-boosting measures have fallen woefully short of the boldness required.

Scot-Buzz fully supports the call by FSB Scotland for the budget to give priority to encouraging entrants into the small business lending market.

We have continually stressed the need for tax cuts and strongly believe that meaningful tax reductions are now in order, both to boost household spending and to help small firms to grow and invest.

On our website today George Kerevan ably sets out what the chancellor should do in cutting tax and how it can be financed.

There are around three and a half million working poor earning around £15,000 per annum. To finance a tax cut/credit boost equivalent to a month’s wages, says George, would mean finding £4.38 billion.

“Finding a cut of that dimension in the Department for Welfare and Pensions budget of £170 billion is entirely credible – that sum is actually less than the department’s running costs.”

A budget that falls short would be both a cruel disappointment for business and a further blow to households suffering real-terms cuts in income. The further downward trend in interest rates paid on savings further adds to an economy trapped by the failure of an administration to take the action required.