Chancellor boosts bank funding scheme ahead of IMF visit

Within the next two weeks the Treasury is expected to announce an extension to the Funding for Lending Scheme (FLS) in an attempt to reduce potential criticism from the International Monetary Fund during their annual mission to the UK on 8^th May.

The FLS was first launched in July 2012 as a means to increase the credit supplied to lenders through cheap funds, on the condition that the money was used for businesses and homeowners. While the fund initially impressed banks and businesses through its size and intentions, the results so far have been underwhelming.  Indeed, data shows that net borrowing in the last quarter of 2012 fell by £2.4 billion.

The lack of access to credit for business has been highlighted by ministers and entrepreneurs alike as a significant reason for low growth within the UK economy. In this way, the extension to the fund will see credit being offered to invoice financial houses, leasing companies and most importantly, asset finance groups, of which the latter provides a large source of financing for small companies that can borrow against invoices, machinery and property, in the hope of resolving a credit bottleneck experienced by businesses.

However, the banks have expressed some doubt over the success of this move to extend the fund. Many have suggested that the extension of the FLS alone will not resolve low economic growth, as there is currently a fundamental lack of general demand within the economy.  Further doubt has been cast on the extension due to the fact that companies within the UK prefer to rely on their own cash funds rather than risk any possible negative outcomes that could occur with loans.

This doubt regarding the success of the Treasury’s decision follows a statement made by the IMF last week suggesting that the UK “should consider” imposing less austerity measures in the face of such weak growth in the private sector. This was further reinforced when it was made public that the UK is the only country whose 2013 forecast has been slashed by the IMF by more than 0.1 per cent.

The IMF comments and the extension to the FLS come at a time when the Conservative-led government is facing increasing pressure to abandon its policy of austerity.  Indeed, last week, Kenneth Rogoff and Carmen Reinhart’s widely cited paper on fiscal austerity was revealed to contain statistical errors, the effects of which are still being debated by economists.

On Thursday 25^th April the National Statistics Office is expected to release an economic assessment of the first quarter of the year to show that, at best, the UK has narrowly avoided a triple-dip recession. Whether the extension to the Funding to Lending Scheme will yield tangible results ahead of 8^th May remains to be seen.

Peter Winnicki