Banking on Britain

The Labour party is currently conducting a policy review. There are 10 priority topics including A British Investment Bank: Making it a reality. The consultation closes on February 28 and more information can be found here.

The Green Investment Bank is well on the way to becoming a reality. It is entering the final stages of the House of Lords and, though not perfect, it is a positive step in the direction of adequate investment in the future. The Labour party needs to go into the 2015 election with a credible plan for a wider British Investment Bank and a clear understanding of how these new institutions will interact.

Ed Miliband has been talking about this for over a year. Ed Balls and Chuka Umunna set out the case with regard to small and medium size enterprises in the Telegraph recently. All of this builds on Nick Tott’s excellent report which points out that the UK is unique among the G8 in not having a state investment bank.

In 2015 we will be faced with an existing Green Investment Bank and – if Vince Cable gets his act together – a British Business Bank tasked with increasing lending to SMEs. A third market failure that such an institution must address is the chronic underfunding of long-term infrastructure. The simplest answer is the most attractive. There should be one institution. The British Investment Bank. One bank. Three aims.

It makes sense for this to be one institution, not just for the obvious benefits that accrue from shared overheads and expertise but also because there is much in the way of overlap between these three sectors. Many of the solutions necessary for creating a green economy will come from SMEs. As we upgrade our infrastructure we must take into account our responsibilities to the environment. The greening of the economy will require new infrastructure. These issues cannot be approached in isolation.

The question is how to pay for it. Both the British Business Bank and the Green Investment Bank are hugely underfunded. Initial state investment should be being leveraged on the capital markets to provide significantly more money. Even relatively conservative leveraging such as that of the Nordic Investment Bank would increase the available investment funds by 2.5 times the initial government capital. More developed state investment vehicles such as the KfW in Germany manage an 18.5-fold leverage.

The challenge for Labour is to present this in such a way as to avoid the charge of borrowing our way out of recession and increasing the national debt. George Osborne refuses to give the Green Investment Bank borrowing powers until the national debt is falling as a percentage of GDP. Given the economic incompetence of the coalition, this is not forecast to happen until nearly 2020.

In a six-page report, IPPR demolish the chancellor’s argument. Leveraging initial capital in a state investment bank is not the same as the government borrowing to boost the economy. The British Investment Bank would be tasked with making a profit but not at the expense of its public policy agenda. The chancellor’s approach to the Green Investment Bank currently assumes that every investment will make a loss, the bank will run out of money and none of the assets in which the GIB invested will be worth anything at all! Even by Osborne’s standards, this would be appalling.

Labour must go into the next election as a fiscally responsible and economically credible alternative government. This is the electoral ballgame in 2015. But, as IPPR points out, ‘The standardised national accounts of the OECD make a distinction between general government spending and the spending of public corporations or parastatal bodies or enterprises. The former is financed from taxation; the latter are bodies with their own balance sheets and revenue sources. Those revenues, not taxes, are the primary source of funds to finance their debts. The UK is anomalous in not making that distinction. Everything in the state sector in this country has its borrowing lumped into the Public Sector Borrowing Requirement.’

A British Investment Bank could help to get the economy moving as well as addressing market failures in the financing of green investments, SMEs and infrastructure. The only credible way of doing this is at arm’s length from government. It would be ludicrous to treat such an institution in the same way as a Whitehall department. Until we realise this, we’re going to be competing in what David Cameron calls the “global race” with one arm tied. No one else in the G8 is handicapping themselves in this way. If the coalition refuses to free up the British economy and British businesses, the next Labour government must do so on its first day in office.

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Adam Tyndall is a member of the Labour party and tweets @AdamTyndall

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Photo: dystopos

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