Cameron urges loan guarantee scheme for banks

A loan guarantee scheme should be established to enable banks to keep lending to businesses during the downturn, Tory leader David Cameron said today.

Mr Cameron said the temporary National Loan Guarantee Scheme would provide "billions of new loans" to UK businesses.

Banks could use the scheme to underwrite a "significant per cent" of any new loans to business, particularly on short term credit lines, overdrafts and trade credit.

In a speech to thinktank Policy Exchange in central London, Mr Cameron attacked Gordon Brown's package of measures designed to guide the UK out of the economic crisis.

He said the bank recapitalisation was failing because Mr Brown was more concerned with "boasting about it abroad" than saving the real economy.

The measures proposed by Chancellor Alistair Darling did not address the recession in the economy but the "recession in their polls".

Mr Cameron said the Tories' proposed credit scheme was on a "different scale" to the Government's "much smaller and more bureaucratic" Small Firms Loan Guarantee Scheme.

He said the guarantees in his scheme - like the Government's - would not cover 100% of the loan.

"Why not? Because it's important that banks take a share of the risk to prevent reckless lending," he said.

"And because they will have the right incentives, it will be the banks not Government making the decisions about who to lend to.

"But crucially they won't need as much capital, the very thing they are so short of, in order to lend."

The National Loan Guarantee Scheme would guarantee loans for a commercial insurance fee, passed on by the banks, that would "properly protect the taxpayer".

The scheme would be chaired by someone appointed by the Chancellor with the agreement of the Governor of the Bank of England.

Mr Cameron said: "This is not a new spending programme financed by more borrowing. It is like the secured guarantees for a fee that the Bank of England has already put in place for inter-bank lending, which we supported.

"And most important of all, by guaranteeing credit to our businesses, it gets to the heart of the credit crunch and goes a long way to solving Britain's credit problems."

Tory proposals to help people through the downturn also include:

- Small businesses allowed to delay their VAT payments for six months - a £10 billion boost for small firms;

- Small companies' tax rate cut to 20p and the main rate to 25p;

- Employers' national insurance cut by 1 per cent for the smallest firms;

- £3 billion tax breaks for jobs scheme to reward firms which take on new staff.

Mr Cameron said the Government had "taken its eye off the economic ball" because of its obsession with a fiscal stimulus.

"It's in monetary policy, not fiscal policy, where we have most to learn," he said, "and monetary activism, not fiscal stimulus, where politicians and economists must aim their firepower."