GEORGE Osborne, the chancellor, yesterday unveiled plans to inject tens of billions of pounds worth of government cash into small firms, as he sought to silence critics who say he is not doing enough to promote economic growth.
The so-called “credit easing” scheme will see the government finance companies by buying their debt in the secondary bond markets, allowing small and medium-sized firms to raise cash without having to rely on bank loans.
Aides to the chancellor said the scheme could eventually be expanded to include larger firms and corporations if the Eurozone crisis deepens and bond markets dry up.
Osborne said: “As part of my determination to get the economy moving I have set the Treasury to work on ways to inject money directly into parts of the economy that need it such as small businesses.”
The Treasury will raise cash to fund the bond purchases by selling gilts, before asking the Bank of England or an arms length body to buy the commercial paper on its behalf. The government claims that because it is buying assets – rather than cutting taxes or increasing spending – the scheme will not add to the deficit.
However, if a large number of companies default on the bonds, as is often the case with small and medium sized firms, it could leave the Treasury nursing huge losses and do real damage to the public finances.
Terry Smith, chief executive of Tullett Prebon, said: “So-called ‘credit easing’ is totally misconceived. If you thought the banks were bad at lending, wait until you see what happens when the government try it.”
Currently, the market for commercial paper issued by Britain’s smaller firms is virtually non-existent and the cost of borrowing is prohibitively high. The government claims that by buying bonds it will push down yields and encourage private investors to follow suit, thus growing the entire market.
Meanwhile, Osborne announced plans to introduce fees for employment tribunals. From April 2013, employees will have to pay as much as £250 to bring an unfair dismissal or discrimination claim and an extra £1,000 if they decide to take the case to a hearing. Fees, which would be refunded if the claimant wins, will be substantially higher for those trying to claim compensation over £30,000.
The chancellor also confirmed he will double to two years the amount of time that a member of staff must be employed before they can claim unfair dismissal.
“Of course some people will say it’s unfair,” an aide to Osborne said. “But if you want a more competitive economy you’ve got to make some controversial decisions.”
As Osborne took to the stage, he received an unexpected boost from ratings agency S&P, which said the UK’s triple-A debt rating was safe – but only if it sticks to its deficit reduction plan.