One of the first decisions made by the Coalition Government on coming to power was to cancel an £80m loan promised by its predecessor to Sheffield Forgemasters. Vince Cable, the Business Secretary, explained that the Government did not have the money but that anyway, its job was to "create the right business environment" for private sector companies to flourish, rather than to "keep writing out cheques".
Less than 18 months later, George Osborne appears to have changed his mind. For the "credit easing" he announced yesterday is, on the basis of the vague briefing from the Treasury, an initiative that would see taxpayers lend to companies unable to get credit from traditional sources such as the capital markets or the banks.
For this, the Government does have the money, if only by a trick of the accounting regulations. Since the loans will be packaged as corporate bonds, which can be bought and sold on debt markets, they will count as tradable assets rather than spending that adds to the deficit in the public finances.
Still, neat though the trick may be, do not make the mistake of thinking there will be no risk of taxpayers making a loss. If the Treasury has to intervene because these companies can't find credit elsewhere, it seems fair to assume the bonds will sit on its balance sheet, shunned by those buyers who didn't want to lend in the first place. This means not only that it will be tough to recoup the cost of the loans by selling them on, but also that each time a company defaults on its debts, the public finances will take a hit.
We await the detail of the Chancellor's ideas, but at first sight, credit easing looks, at best, to be of pretty limited use, while at worse, it could be dangerously expensive.
Of limited use since, in the first instance, the Treasury would only lend to larger companies. As Mr Osborne's officials acknowledge, that's a theoretical offer, because large corporates are now mostly getting bond issues away. The Treasury would only step in were credit markets to freeze in the way they did immediately after thecollapse of Lehman Brothers.
Dangerously expensive because Mr Osborne thinks extending the initiative to small and medium-sized companies – the sector of the economy that says it finds it hard to get credit for investment – would help the development of a corporate bond market for these businesses. It might, but only after Treasury officials, or the officials of an agency appointed specially for the task, have been asked to start making judgements about whether or not to lend taxpayers' money to private sector firms.
Now, let's not pretend that Britain's banks always make the right decisions when asked for credit by SMEs (though the banks still insist that credit contraction is as much to do with a lack of demand as a shortage of supply). But hands up if you like the idea of civil servants, or even the staff of an arms-length but still publicly funded agency, making the call on whether company A is a good bet for a loan from the taxpayer.
Finally, an observation on a more positive note: it looks as if Mr Osborne's ideas are based on proposals made last month by the economist Adam Posen, who is best known for his doveish approach on the Bank of England's Monetary Policy Committee. Mr Posen calls the scheme British Enterprise Investment Equity – or Bennie for short. At least that's something to smile about.
S&P does George Osborne a favour
One imagines Barack Obama does not have many reasons to feel envious of Britain's Chancellor, but the President could be forgiven for wondering why Standard & Poor's has it in for him while continuing to cosy up to George Osborne.
The Chancellor must have been braced for the worst as he read the ratings agency's latest report on the UK economy yesterday. S&P began by predicting the UK would miss its official growth forecasts by some margin, continued by warning that private sector growth would not be sufficient to make up for the impact of public sector cuts and finished by concluding that the Treasury's expectations on deficit reduction will prove over-optimistic. With that litany of gloom, surely S&P would have to reconsider its AAA credit rating for the UK?
As we now know, that was not the agency's conclusion. Instead, it chose the day of the Chancellor's keynote speech to Conservative Party conference to give his Plan A some invaluable public affirmation. No doubt, Mr Osborne will seize upon S&P's praise as he makes his case this week.
S&P's analysts are, of course, deficit hawks, so to abandon a Chancellor who shares their zeal would no doubt feel like a betrayal, whatever the rest of their analysis tells them. Contrast that to the US, where S&P downgraded on the basis of its views about the political rowing over the deficit, rather than because of any real increase in the chances of a default on US sovereign debt (which is why the downgrade has been routinely ignored in the markets).
Even so, S&P's apparent indifference to the dangers of perceptions that its interventions are political – surely it would have been wise to avoid releasing this report yesterday? – is odd given its need to restore credibility in the aftermath of the financial crisis.
Those who continue to worry that the Chancellor's focus on deficit reduction, at the expense of growth, may in the end lead to the ratings cut he insists his strategy is designed to avoid, might like to look up an analysis published by Danske Bank yesterday (though maybe like is the wrong word).
Its economists have just been through the UK's public finances using the detailed methodology S&P says it uses to assess sovereigns. On that basis, Danske says, the UK should not be rated AAA but A+ – four notches lower and on a par with Italy.Reuse content