FORTUNATELY, nobody really expected a flurry of pro-growth reforms in George Osborne’s keynote speech yesterday, which means that few will have been disappointed by the notable lack of new supply-side policies.
The doubling of the qualification period for unfair dismissal claims had been widely trailed. There was a softening of the war against carbon, which threatens to make British manufacturing uncompetitive by hiking costs. But the chancellor’s message – that carbon reduction would not take place any faster than in the rest of Europe – suffered from incorrect benchmarking. The UK’s rivals when it comes to the location of manufacturing activity are not in Europe – they are in emerging markets. It might have sounded like a pro-growth statement to the Treasury (which spends more and more time dealing with Brussels) but to UK Plc (which spends its time dealing with the world) it means nothing.
The big announcement was the pledge to ease credit conditions for small businesses. The details of Osborne’s “credit easing” plan remain sketchy but the aim is to help make firms, including smaller ones, less reliant on bank finance and more able to access the bond markets. In theory, therefore, this sounds like a good idea. But the first problem is that the government is once again focusing on debt financing, rather than equity. A drastic increase in incentives for venture capitalists to help fund firms may have been a better solution than yet another scheme to increase debt. The changes to the Enterprise Investment Scheme at the Budget were too complicated; and it confirms just how misplaced the nation’s priorities are that so many people obsess about reforms to debt financing and hardly anybody cares about changes to equity financing.
But there is a more substantive problem. It is hard not to see the parallels between Osborne’s plans, which would involve massive government intervention, and what happened to the US mortgage market. If it decides to start a vehicle to purchase bonds issued by small companies, as hinted yesterday, the UK government would encourage their issuance. But it will also mean that the private sector will no longer have an incentive to check their quality, which means that we could soon see an explosion of dodgy, sub-prime small business debt.
Thousands of businesses could over-extend themselves and go bust, and the taxpayer would risk losing a fortune, especially if sound firms continue to borrow from banks and the bad ones tap into the government’s scheme. Osborne may also want to encourage the securitisation of small firms’ loans. Again, this may be a good idea but not if moral hazard destroys the idea as a result of government guarantees. Osborne’s real plan is probably to create a system that could be extended to guarantee all private bond issuance in case the Eurozone implodes; but this would threaten the UK’s solvency by over-extending the government’s balance sheet.
Like all other previous attempts at socialising credit, and turning the government into a bank manager, Osborne’s scheme will backfire spectacularly if it is ever implemented properly. The chancellor’s preoccupation with credit has blinded him to small firms’ real problem: they are in desperate need of regulatory and tax relief. Sadly, none was forthcoming yesterday.
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