A BUSINESS LENDING SHOCKER FOR THE BANK
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.
MORE POWERS: WEST MIDLANDS WON'T STAND IDLY BY
Unionist parties at Westminster hope they can fast track more powers through the Commons in time for draft legislation by next January. Dream on.
Not only will any new legislation be subject to keen scrutiny – that’s what parliaments are for – but it will also have to contend with arguments from economically struggling areas elsewhere in the UK that they should not be overlooked.
This is the Pandora’s Box that the Scottish referendum has sprung open. In an important article, Paul Forrest (pictured, third from left), head of research at the West Midlands Economic Forum, sets out why his region should not be disadvantaged by Westminster rushing through more powers for Scotland.
The Scottish Referendum debate has centred on whether Scotland is stronger in the Union or outside it – little attention has been paid to which option benefits the England and the West Midlands. The impact on the region of Scotland remaining in the UK could indeed be negative for the region.
The No-side appear to have adopted a negative campaign, simply stating that Scotland would be £1400 per head better off if it voted No. The Yes campaign, with its romantic populist approach, argue that the Independence windfall would be £1000 per head.
Whatever happens, major changes can be anticipated. The three main Westminster parties have already made un-costed commitments to further devolution if the vote is No, effectively moving toward further Scots financial autonomy in all areas, except defence, foreign affairs and social security.
Assessing the impact of either outcome is difficult, not least due to lack of hard data. It is relatively easily to quantify relations between national economies as they have clearly defined economic spaces, trading and tax regimes. Defining relations between sub-national entities such as Scotland and England or the West Midlands is reliant on assumptions, which can be politically slanted, because of data weaknesses.
Scotland and England have no single-defined border to determine the extent of the respective economies - according to some there are at least nine internationally acceptable variants of the North Sea border.
There is no agreement on the division of the continental shelf in the North Sea, currently the fisheries zones are used for determining allocation of North Sea energy resources. Statistically these resources are allocated by the ONS to the Continental Shelf (or Extra-regio). Proponents of Scottish independence assume North Sea revenues should be allocated to Scotland. With these revenues, Scotland per head provided an estimated £789 more in tax than the UK as a whole in 2012-13. Scottish public expenditure per head, however, in the same period was some £1256 (11%) higher.
If Scotland does vote yes, the true fiscal position will become quickly apparent and negotiation commence on an equitable and transparent redistribution of national asset and liabilities, including natural energy resources, debt and currency reserves as well a range of cross-border issues that have yet to be identified or quantified.
What could be the impact of the Scots remaining within the UK?
The current structure of funding is via a combination of the Scottish block grant and UK Departmental expenditure north of the Border.
Currently public expenditure in Scotland is equivalent to 9.3% of the UK total, despite an 8.4% population share. In 2012-13, per person this equated to £7932, 16% higher than the UK as a whole (£6722).
Annual recurrent public spend per head was 12.5% higher, and annual capital spend per head 48.2% higher than for the UK.
Significantly, Enterprise expenditure per head in Scotland was three times higher and the differential with the West Midlands, which received £262 per head, was more pronounced with Scotland’s receipt of £1001 per head. Similarly on transport activity, the West Midlands received £1112 per head compared to Scotland’s £2722.
There are arguments that Scotland receives more because of its greater relative deprivation and isolation, however there are parts of the West Midlands that suffer equally, if not more badly in terms of poverty and structural employment, whilst in Herefordshire, Shropshire and Staffordshire there are communities that are as equally isolated as many Scottish populations.
It is also argued that the Barnett Formula that determines the block grant is based on needs. However the baseline was calculated on the expenditure levels current when the political fudge was struck in 1979, with expenditure raised incrementally and proportionality since.
Expenditure was allocated according to 1979 population levels, although political expediencies subsequently have seen major funding variations. For capital expenditure, the national basis of the calculation has the perverse impact that London capital expenditure (by far the main recipient) reduces the available capital for other English regions, whilst simultaneously increasing the allocation available for Scotland.
The key problems of the Barnett Formula is its lack of transparency in its calculation and focus on political expediency rather than addressing very real social problems which are usually concentrated in specific pockets within regions, rather than generically to regions as a whole.
If there is a long-term structural unemployment problem in Wolverhampton it should be treated as equally urgently and effectively as if it were in East Kilbride or Newport.
With Scotland being promised control of some income and other taxes, such as Air Passenger Duty (APD), unless the Barnett Formula is restructured, or indeed a new methodology altogether adopted, this will exacerbate the asymmetrical devolution of governance that currently exists and put devolved administrations at a fiscal advantage.
If, for instance, the West Midlands took control of APD this could radically alter Birmingham Airport’s potential and consequently significantly boost the regional economy. The Davies Commission has implicitly and more recently explicitly stated the strengths of the Airport, but cited some reluctance on the part of international carriers to fly there, reducing or abolishing APD could transform its international attractiveness.
London, Wales, Northern Ireland and Scotland have institutions that take strategic economic views and lobbying for their implementation. English Regions, however defined, have no comparable capacity with no consensus on how devolution, if at all, should proceed. There are interesting proposals for combined local authorities, and both the Heseltine and Adonis Reviews have suggested ways forward. Proposals to give City Regions greater powers offers some scope, although again there needs to be mechanisms for them each to work together effectively. The One North proposal is an innovative approach that incorporates disparate City and local identities and harnesses them collectively to create a new regional approach.
The West Midlands, and indeed the Midlands collectively needs to decide how it can move forward and strengthen what is already one of the more dynamic and productive regions globally.
This article first appeared in The Birmingham Post
