It seems that the Business Secretary, Vince Cable, has secured a promise from the Treasury that it will back his idea for a state business back with £1 billion of taxpayers' money. He hopes that the new 'British Business Bank' will be up and running in 18 months, when it will start lending to small and medium-sized businesses, particularly manufacturers, exporters and high growth companies. By applying leverage through guarantees, cable argues, the new bank could support additional finance of £10 billion for SMEs.
This announcement is not the Coalition's latest effort to lift the economy out of its double-dip recession; the new bank will not be operational until midway through 2014 at the earliest. It should instead be seen as Vince Cable's attempt to leave a legacy from his time at the Business Department in the form of an institution with the potential to transform lending to small businesses in the UK.
This transformation, if it happens, is going to be a slow one because a £1 billion capital injection, even if it results £10 billion of additional lending, is small beer in an economy of £1.5 trillion. (By comparison, under Project Merlin, the government sought assurances from banks that they would lend £76 billion to small businesses - and £190 billion to businesses in total - during 2011.)
Given the fiscal situation and the Treasury's determination not to relax its programme of spending cuts, Vince Cable will probably feel he has done well to get even £1 billion of funding. But this does, therefore, fell like a missed opportunity. In a just published IPPR report, my former colleague David Nash and I argue that such a state bank should be much more ambitious in scope.
We suggested the Bank should have an initial capital injection of £40 billion, spread over four years (£10 billion a year is a little less than the amount the Coalition has cut its capital expenditure by in the current spending round). If the Bank was allowed to raise £2.50 on the financial markets for every £1 capital, this would mean it could have a balance sheet of £140 billion after four years.
Would this be enough to make a big difference to the UK economy? It is hard to say with any certainty. Demand for funding by the Bank would only become clear once it was operational. But £140 billion is around 9 per cent of UK GDP - and roughly one-third of the size of the European Investment Bank's balance sheet - and so would seem to be a good initial target.