Cable plans provide comfort for banks but nothing for SMEs

Leading economist and new Labour MP Rachel Reeves writes exclusively for Left Foot Forward on Vince Cable's lack of support for small and medium sized enterprises.

Our guest writer is Rachel Reeves, Labour MP for Leeds West

Yesterday, Vince Cable and his Department for Business, Innovation and Skills were supposed to set out their much-needed strategy for increasing access to finance for small and medium sized enterprises (SMEs). Instead, what we got was a ‘discussion document’ titled “Financing a Private Sector Recovery” which, though 40 pages long, contained not one policy proposal.

This was worse than not publishing anything at all – if Vince Cable, and the Chancellor of the Exchequer (the paper was written in conjunction with the Treasury) have nothing to say and no proposals to announce, it is both damaging and insulting to raise the expectations of businesses with a paper such as this.

With an estimated 4.8million SMEs accounting for more than 50 per cent of private sector employment and turnover, these businesses are the driving force of the economy. Which is why their ability to access the finance they need at affordable rates is so fundamental to the economic recovery.

As a member of the business, innovation and skills select committee, I had pressed Vince Cable on the lack of bank-lending to SMEs last week, and was falsely reassured by the promise of yesterday’s paper, which was to set out the range of ‘instruments, sticks and carrots’ to address bank lending.

After all, it was Vince who previously delivered such tough rhetoric about the banks. Prior to the election he argued that “business is being strangled by a lack of credit” and accused the government of “failing to ensure good British businesses get the money they need”.

He worried that “unless business can get the credit they need to create jobs and growth, there will be no recovery” and pressed that “the government must take a firm hand with the banks we own to ensure that they are lending to British businesses and supporting our own economy”. And even after the election, he told Cass Business School that he was “taking a tough line with parts of the banking system which have not served enterprise as well we they could”.

So it was with mounting disappointment that I read yesterday’s vague paper. While I welcome many of its ambitions for the future it fundamentally conflates the pressing need for SMEs to get finance in order to secure the economic recovery with the longer-term agenda around improving access to different types of finance.

I know there are no easy answers and indeed the Labour government struggled to find the right solution. But it is now more than ever that we need to ensure that SMEs can access the finance they need for growth as the cuts to the public sector begin to bite.

As Vince and George say in their foreword, “ we need a recovery led by sustained expansion in the private sector, and in particular through a growth in business investment, seizing the opportunities presented by a recovering global economy”. I fully agree, and indeed with the magnitude of the austerity cuts, not least to the Regional Development Agencies, and the travesty of the cancellation of the loan to Sheffield Forgemasters, the development and growth of SMEs is critical to a strong and sustainable recovery.

Yet, it is SMEs that continue to struggle to access finance. As the green paper mentions, the Bank of England’s Credit Conditions Survey and reports from the Bank of England’s network of agents suggest that access to credit has eased more for larger business than for the more bank-dependent smaller businesses. The plain fact is that willing the ends is not the same as willing the means.

This paper simply doesn’t go far enough in calling for action robustly or swiftly enough. It acknowledges that “the challenge is to ensure that as the economy picks up and as demand increases, the supply of finance supports rather than constrains the recovery” .While this is all well and good, with the prospect of a double-dip recession still very much a reality, immediate action is critical to tackle the sub-optimal bank lending in the short-run. We need this not only to ensure that the recovery continues, but also to ensure that it results in the sectorally-diverse and regionally-diverse economy that we should so desperately be aiming for.

Vince Cable promised ‘instruments, carrots and sticks’, yet this paper focuses only on the carrots and sticks. By instruments, I had assumed he was referring to real measures such as bank-lending targets. Those commitments made by Lloyds Banking Group and Royal Bank of Scotland in March 2010 get a mention, but only to say that the Government will keep these ‘under review’. There is no firm talk of extending targets to a wider number of banks – after all it is not just the nationalised banks that have received substantial support from the Government as all banks have benefitted from loan guarantees, quantitative easing and the insurance on consumer deposits.

There is no firm suggestion of making the existing targets stricter. There is no mention of firm action on any punitive measures if the banks miss their targets. And there is no action outlined on the extortionate fees and charges being imposed on SMEs wanting to borrow to ease cash flow or to invest in plant or equipment while business investment continues to fall. Yet all this is exactly the sort of robust, decisive action that needs to be undertaken by the Government to set the banks to lend.

The only group who can possibly welcome this paper today is the banks. They have had confirmation that their bonuses will not be significantly taxed as the bonus tax introduced by Labour is left to wither on the vine, the threatened banking levy will bring in only £2.5 billion at its peak, and now they have learnt that they will not have to lend any more than they are now.

As the Bank of England points out, if the banks cut bonuses and dividend payments they would have enough to both increase their capital and to lend more to businesses. But instead the government are allowing banks to carry on with business as usual  – paying out bonuses to those at the top while doing little to stimulate the businesses, jobs and industries of the future.

This behaviour of the banks is in no small part due to the lack of competition in the market. I was pleased to see the report highlight how important a competitive banking market is in ensuring the right products and services are on offer at economically efficient prices. But again, there is no action.

I welcome the new Independent Commission on Banking that will look into the structure of the banking sector, but am dismayed that the final report will not be published for over a year. I therefore urge Vince Cable to think again about what should and could be done in the short-run, and ask him to put his powerful talk of taking the tough line on banks into swift and decisive action.

Otherwise, I can’t help but conclude that while Vince’s intentions are in the right place – it is George Osborne that has taken the tough line with Vince in not allowing Vince to take a tough line with the banks.

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