CBI's Lambert says healthy credit markets key to turnaround

The Director-General of the CBI, Richard Lambert, has said that tax policies contained in next week's pre-Budget report by the Chancellor will be less important than ending the credit crunch itself.

Interviewed by The Independent yesterday, Mr Lambert said: "Getting the credit markets working properly is much more important than the fiscal boost. We need an atmosphere in which viable businesses can get the finance and the working capital they need."

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He dismissed the Government's attempts to restore bank lending to 2007 levels as "all politics, really", and called on the authorities to "do whatever it takes" to restore order to the financial system. "There's a real grinding noise coming out from across the business sector," Mr Lambert warned, though on suggestions that the state should lend to companies until the banking system was restored to normal, he said: "I would be very wary about getting into a world where government was responsible for making choices about which companies were going to live and which were going to die."

He said the CBI would support a major boost to the economy in Monday's pre-Budget report only if it was a "one-off shot in the arm" and "accompanied by a roadmap to get the public finances back into shape over a sensible period of time".

"The public finances are lousy and getting worse," he said, warning that the recession was about to become "bloody uncomfortable".

Mr Lambert is also critical of state aid for strategic sectors, along the lines proposed by President-elect Barack Obama and some in the European Commission for the US and European car industries: "I find that worrying. If we get into beggar-my-neighbour policies where countries are using state money to support failing sectors, then you find yourself in real difficulties. Competition stops working and capital doesn't flow to dynamic new firms. So the preferred option is to make markets work, and let markets allocate capital".

He explained: "The banks have been on the edge of a precipice... This is the killer fact: back in 2001 customer loans were roughly balanced by customer deposits, but by the first half of this year a £700bn gap had opened up, which had been filled by securitisations and other means that are no longer available."

CBI member firms tell him that consumers are holding back from buying "big-ticket" items such as cars and from property purchases, because of fears about losing their jobs. The CBI recently forecast that unemployment would climb to almost 3 million by 2010.

Mr Lambert said, however, that the economy was going through a necessary correction.

"I do want to emphasise that the economy needs to rebalance. Over the last few years, growth was driven by domestic consumption and government spending to a position that was unbalanced. What is happening now will eventually have a positive effect of bringing a more balanced approach to growth in the economy... My worry is the pace of the unbalancing in the short term, which is bloody uncomfortable."