With 10-year bonds at their lowest level in recent times, the government must take the opportunity to channel much-needed investment into major infrastructure work
In the middle of June the chancellor George Osborne delivered his Mansion House speech alongside the governor of the Bank of England, Mervyn King. They launched a two-pronged programme, the thrust of which was to try and redeem the situation following the failure of Project Merlin to lend to small and medium-sized business.
In fact, the problem goes further than just SMEs. Even larger enterprises are finding that they’re being pushed into “clubs”, at vast expense in terms of setting up borrowing facilities outside the normal banking system.
The announcement itself can only be welcomed. The question is what comes next. One set of people queried whether encouraging lending by facilitating, which means indemnifying the sums to be released by the Bank of England, might lead to unsustainable borrowing by firms that should not be taking the risk. Others fear the opposite. Namely, that this will be another scheme without the mechanisms to channel the resources at a price businesses can afford, at the time they need it.
Capitalism requires risk. The notion that financial institutions should be risk averse is in fact the very opposite of a dynamic enterprise economy
On the first count, the fear is perverse. It was not small business borrowing that got us into this mess in the first place. It is certainly not businesses of any description that are responsible for unsustainable lending, and in any case, unlike Ireland or Spain, even the “bad loans” would not have proved catastrophic without other crass decisions.
In any case, capitalism requires risk. The notion that financial institutions should be risk averse is in fact the very opposite of a dynamic enterprise economy. Not, of course, foolish and unsustainable risk, but an understanding that entrepreneurship means having a go in circumstances where sometimes innovative ideas come to nothing.
The second fear, that this initiative will also bite the dust, is in my view nearer to the mark. It is here that imagination is needed.
The fact is that, through the reassurance to the bond markets that the government does mean to carry through its deficit reduction strategy, we have secured the most benign conditions for government borrowing in recent times: 10-year bonds at less than 2% and the opportunity for much longer term borrowing at phenomenally preferential rates.
But always with an eye to ensuring that the structural deficit will be dealt with within a reasonable period of time, what is the point in having phenomenally low, medium- and long-term interest rates if you do not take advantage of them?
Yes, I know that if you take advantage in the wrong circumstances, the borrowing rate will immediately rise and the unaccountable credit rating agencies will intervene. Yet surely this is the time when the government, in conjunction with the business community, could agree a vehicle by which this advantageous borrowing could be channelled immediately into major infrastructure work, geared to saving revenue commitments, energy and so on? The chancellor is, after all, already trying to get sovereign pension funds to lend for precisely such investment. So far, without discernible success.
The problem is one of perception. What used to be called the public sector borrowing requirement would take a hit because, of course, it would be the government that was borrowing. But not in relation to that all-important structural problem of spending more on day-to-day outgoings than the government is getting in through taxes; rather in balancing what the government borrows with what it is owed.
An accountancy framework that would have some logic in the 21st century - facilitating borrowing by business, at slightly higher rates than the government is able to borrow itself - takes us into a modern version of what used to be called the Public Works Loans Board. What if we had a combination of loans for major private infrastructure and a stimulation to those long-term projects that renew our infrastructure, for which the government clearly has responsibility?
Given that it is indisputable that the economy needs a massive boost, that two quarters of negative growth is unacceptable and that we are undoubtedly affected by the turmoil of the eurozone, imagination, bravery, and yes, risk, are required. I know that such ideas would require a redefinition of what is and is not off balance sheet, and cause a heart-attack-inducing spasm at the Office
of National Statistics. But if politicians are to respond to the issues of the moment, they need to be in charge, rather than simply flotsam on tides outside their control.
The German chancellor can only say “nein”. The British government needs to be able to say “why not?”.
David Blunkett is MP for Sheffield Brightside and Hillsborough, and a former home secretary