The 'credit easing' announced by the chancellor could help businesses and inject more cash into the economy. So is this still plan A?
The chancellor has paved the way for so-called 'credit easing' to help UK firms get access to loans. This is a radical monetary - if not fiscal - departure for the government from its tough talk on ‘Plan A’, and is potentially a very significant tool to spur growth – depending on how it’s done.
Credit easing would involve the Treasury buying up corporate bonds of larger companies, but also SMEs. This would increase the level of cash in the economy and reduce the cost of borrowing to these all-important firms. Through these mechanisms it could have a very significant impact on growth.
But if this plan is to work, it has to be done at the right scale and in the right way. Bank of England MPC member Adam Posen, estimates that the existing £200bn quantitative easing intervention by the Bank has boosted GDP by 1.5%. Something on a similar scale looks necessary in this quasi-QE2.
Second, since SMEs don’t issue bonds that can readily be bought, how credit easing is designed to help these smaller firms will matter hugely to its effectiveness. There seem to be three options here.
- First, the Treasury could buy up bundles of SME assets currently held by UK banks. A danger here is that the banks will off-load the riskier assets onto the taxpayer and use the cash to help rebuild their balance sheets, rather than to create more SME lending. That would impair the effectiveness of the plan and limit the amount of cash getting into the real economy.
- A second option would be for HMT to capitalise a new public bank to kick-start lending to SMEs more directly, as Posen has suggested. But wait a minute; doesn’t the taxpayer already own a few banks?
- The third option, therefore, would be to use the existing state-owned banks to get lending, as Sam Brittan proposed in the FT recently.
Either of the last two options would seem sensible ways of injecting credit where it’s due. We’ll have to wait until November to find out which route Osborne plans to take.
Perhaps a more intriguing aspect of today’s announcement is whether or not it constitutes a deviation from Plan A. Inevitable, that depends how you define Plan A. Credit easing isn’t formally a fiscal policy: since the Treasury would be engaging in financial transactions, the investment wouldn’t hit the headline national debt. But the taxpayer would instead be bearing a large amount of risk – risk that private investors don’t currently have the appetite to bear. Viewed in that way, this looks like a plan B of sorts. Thank goodness for that.
