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Chuka Umunna

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The Lifeblood of the Economy

Posted: 11/07/2011 02:00

"The British economy is indeed recovering...economic growth is now strong" and "it will become stronger" as a result of the work the Government is doing. This was the Business Secretary Vince Cable speaking in the House of Commons on 13 January.

The reality was somewhat different. Two weeks after Cable's claims the Office for National Statistics told us GDP had decreased by 0.5% in the last quarter of 2010; in April they told us GDP had increased by just 0.5% in the first quarter of 2011. So the economy flatlined under Cable's watch.

Second quarter figures for 2011 are due on 26 July. The highly respected NIESR expects GDP growth of just 0.1% for this period. If correct, that would mean GDP growth of 0.1% in 9 months suggesting that Cable is living on a different planet.

The Opposition and the Tory led Government disagree profoundly on the pace and scale of deficit reduction. Reducing the deficit is essential but, as former US President Clinton pointed out this week, because of the policies pursued by the Tory led government "there's a good chance economic activity will go down so much that tax revenues will be reduced even more than spending is cut and [the] deficit will increase". Where there is agreement is on the need for the private sector to spearhead growth in the future. Small and medium sized businesses are crucial to this because they are the backbone of the British economy, responsible for six out of ten private sector jobs and over £1.5 trillion of private sector turnover.

However SMEs face many obstacles - one that is raised time and time again is access to finance. SMEs cannot look to capital markets for finance in the way big business does so they rely on our banks. I visited one such business last week - a family run private nursery employing over 50 people in my local area; I met another in Leeds this week, a young entrepreneur running a digital media outfit. Both successful established businesses run by people who work hard, play by the rules and are passionate about the service they provide and the communities they provide them in. Both bank with one of the major retail banks and were told in the last 18 months - out of the blue - that their lending terms and conditions would be changed despite the health of their businesses, creating great uncertainty and stress.

The Government negotiated the Project Merlin agreement with the banks in February, promising it would lead to an increase in lending to SMEs by £10 billion (from £66 billion in 2010 to £76 billion in 2011), yet the banks collectively missed the quarterly target by £2.2 billion for the first quarter of this year. This is supported by the Bank of England's agents out in the country - they say small firms "generally perceived credit conditions to be very tight" and "were reluctant to approach banks in case it led to an increase in the cost of existing borrowings, or reductions in overdraft limits". Consequently many are resorting to using personal credit cards and other means to help with cash flow. We cannot go on like this.

What's the alternative? First, we were told bank CEO pay would be linked to satisfaction of those SME lending targets but the Government failed to check how this would work in practice and is now - by Cable's own admission - having to revisit the issue. Labour would have given Merlin real teeth, insisting the banks evidence how CEO pay would be linked to lending targets before finalising the agreement.

Secondly, the government has established the Regional Growth Fund under which it will allocate £1.4bn over three years to support businesses (two thirds less than allocated under the previous government through Regional Development Agencies). We would add an extra £200m to the RGF through a repeat of the bankers' bonus tax and re-examine the eligibility criteria for it too - currently many SMEs are excluded given the minimum threshold for bids is £1m.

Thirdly, in his last budget before the election Alistair Darling announced the establishment of a business growth fund for small businesses paid for by the banks. This was taken forward by the banks who announced the establishment of the Business Growth Fund in October 2010. This is welcome but, again, the £10 million threshold for bids excludes many SMEs from being able to apply. We would tell the banks to look again at the criteria in order to provide greater access to SMEs.

So the government has failed to deliver for SMEs when what they deserve is an active, intelligent government doing all it can to help businesses prosper, grow and create wealth for the country. Without this, the risk of an economy continuing to flat line will persist. Let's hope the Tory led Government gets its act together because if it doesn't, the consequences for people up and down the country will be disastrous

 

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