Should the coalition support Nick Clegg’s plan to set up a state-run bank for lending?


Robert Skidelsky

Nick Clegg’s idea for a state-run bank to lend to small enterprises is a step in the right direction, but as usual, the details are missing. At the moment, it sounds like another version of the loan guarantee plans which have already failed to get money flowing. Unlike Germany, Britain does not have a strong Mittelstand, and lending alone will not build one. The government should fund a British investment bank to attract private capital for major infrastructure projects. This would provide an immediate boost to the economy, and at the same time tackle some persistent failures in capital markets. Showing the government is willing to invest in the right project would lift business expectations, and the contracts from large projects would flow down to small and medium-sized enterprises. A bank that invests for the long term could also counter the chronic short-termism of financial markets.

Lord Skidelsky is professor of political economy at Warwick University.


Sam Bowman

A state-run investment bank would give the government the power to spend taxpayers’ money on projects that no investor would touch. Supporters say that the private sector is too risk-averse, but private lenders have every incentive to invest in profitable projects. Entrepreneurs who successfully buck the trend are the ones who make it big. But some projects are so unconvincing that even the most risk-taking investors won’t touch them. Four out of five start-ups end in failure – if the private sector can’t get it right, how will the government? Inevitably, a state-run bank would be used to bail out politically sensitive projects, as was Leyland Motors in the 1970s, at a cost of £12bn to the taxpayer (inflation adjusted). Taxpayers’ money should not be treated more recklessly than private investors’ money just because it’s easier to spend.

Sam Bowman is Policy Director at the Adam Smith Institute.