Chancellor hopes to lend billions to small firms by buying company bonds

The government is considering economic measures to increase the amount of credit available to small businesses, chancellor George Osborne announced today.

Osborne said that he has asked the Treasury to look at a programme of “credit easing” as a way to “inject money directly into parts of the economy that need it, such as small businesses.”

It is understood that such a move would involve the government buying bonds issued by companies, in a bid to lower the cost of credit to firms and also increase the availability of finance. The move would not add to the deficit under current accounting rules as, although the Treasury would bear the risk, it would be buying a tradable asset.

Addressing the Conservative conference in Manchester, Osborne said: “Everyone knows Britain’s small firms are struggling to get credit and banks are weak… [credit easing] could help prevent another credit crunch, provide a real boost to British business, and over time help solve that age old problem in Britain: not enough long term investment in small business and enterprise.” 

In the short term, the Treasury is looking to credit easing to help Britain avoid a second credit crunch. In the medium term, it wants to use it to develop a new loan market for small and medium-sized enterprises, along the lines of that functioning in America.  

Treasury sources have claimed the Government could actually make a profit on its credit easing scheme, because it will receive interest on its loans.

according to reports ministers will have no part in the allocation of funds, and the scheme will be managed by an arms-length company or by the Bank of England, acting as an agent for the Treasury. Credit rating agencies will perform checks on all potential borrowers, and only those deemed creditworthy will be eligible for loans.    

In another gesture of support for commerce, the chancellor invited the Lancashire and Hull and Humber local enterprise partnerships to put forward plans for two new enterprise zones.

In a statement, the Treasury said the move was a response to the recent announcement by defence manufacturer BAE Systems that it would cut 3,000 jobs on its sites in Brough, Warton and Samlesbury.

The Treasury aims to have the new zones up and running by April 2012, and said the Government would “work closely with the LEPs to develop strong and viable proposals”.    

Director-general of the Confederation of British Industry (CBI) John Cridland said the chancellor was right to focus on small business. He also urged the Government to invest in infrastructure as a mechanism for growth, saying:  

“The biggest opportunity is in leveraging more capital investment in infrastructure, including in power generation, road and rail links, housing and super-fast broadband. We need more detail on delivering these investments by the Autumn statement.    

“The chancellor has some important proposals to help job creation. Small firms are sometimes put off taking on an extra employee because of the fear of ending up in front of an employment tribunal. Doubling the period for unfair dismissal rights and introducing a tribunal fee to prevent vexatious claims will give firms more confidence to hire.”

Phil Orford, chief executive of not-for-profit small business organisation the Forum of Private Business, approved the idea of credit easing but echoed the CBI’s calls for more detail, saying:

“We welcome the commitments to maintain fiscal credibility, accepting that in the sluggish economy the nation can’t afford to borrow more.

“Specific commitments to tribunal changes to give employers more security over job creation, together with the intended investment in 200,000 new homes to stimulate the construction sector, will both be very much welcomed by our members.

“The announcement of credit easing is a positive signal but requires greater detail as to the form this might take and how it will free up credit for the businesses that need it.”

On a note of caution, Mr Orford added: “We do question why similar guarantees cannot be put in place to further stimulate infrastructure investment, which would deliver real growth in the economy.