Outlook: Osborne back in the business of picking winners

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, said the Government did not have the money but that, in any case, 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 modified that stance: 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 like the capital markets or the banks.

For this, the Government does have the money, if only by a trick of the accounting regulations. As 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.

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, the bonds are likely to 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. At worst, 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 after the collapse of Lehman.

Dangerously expensive because Mr Osborne thinks extending theinitiative to small and medium-sized companies 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. 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.