Britain needs a state investment bank

November 14, 2012 1:49 pm

Nick Tott was right when he said in a report for the Labour Party earlier this year that there is a strong case for a British Investment Bank (BIB). Its remit should be to tackle two long-standing problems faced by the British economy: a tendency to invest less in infrastructure than comparable countries and a shortage of financing, particularly long-term financing, for small and medium-sized businesses.

There should be no doubt that these problems are real ones. Measures of international competitiveness, such as those compiled by the World Economic Forum, consistently show the UK’s infrastructure is one of its weak points. And the difficulties small businesses face when trying to get finance was highlighted as long ago as the 1930s (in the Macmillan Report). Their persistence also suggests that new ideas are needed to solve them. A BIB would represent one such new approach.

Vince Cable is setting up a ‘British Business Bank’, but this is only a down-payment towards a real British Investment Bank. It will have a one-off capital injection of £1 billion, which might at the most lead to an additional lending of £10 billion to small and medium-sized businesses. This is small beer in an economy of £1.5 trillion.  Given the fiscal constraints imposed by the Chancellor, the Business Secretary probably feels he has done well to get even £1 billion of funding. But this represents a missed opportunity. In an IPPR report published earlier this year, my former colleague David Nash and I argue that 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 public capital expenditure by in the current spending round.) If, like the Nordic Investment Bank and the European Investment Bank, the BIB was allowed to raise £2.50 on the financial markets – largely by issuing bonds – for every £1 of capital, it would have a balance sheet of £140 billion after four years.

This should be enough to make a difference to the UK economy. £140 billion is around 9% of UK GDP – and roughly one-third the size of the European Investment Bank’s balance sheet. Depending on the demand for funds, more might be needed eventually, but this would represent a good start.

The BIB should be 100% state-owned. It would be profit-making – though not necessarily profit-maximising – but it would not pay a dividend. Profits would be ploughed back into the Bank to allow it to further increase its lending.

The governance structure of the BIB should establish a clear dividing line between the role of government and the activities of bankers. Government ministers would approve the annual accounts, assess the performance of the BIB against its broad objectives of increasing lending for infrastructure projects and to SMEs and discuss any changes to its high-level mandate. It might also choose to require that a proportion of lending is directed, for example, to further the UK’s move to a low-carbon economy. Banking decisions – which projects to lend to and which not – would be the preserve of bankers.

The BIB would need to secure EU state aid approval. While this would not be easy, those who argue there is no point in even developing the idea of a BIB because it would be shot down by Brussels are wrong. The state aid rules are not written in stone. They are designed to prevent governments giving companies in their countries an unfair advantage, not to be a barrier to growth – or to an institution that would support growth.

Some have argued the case for a British Investment Bank to help the economy escape its current weak state; they misunderstand the role a BIB could play in the UK. The need for such an institution will not go away, even in the unlikely event of a vigorous economic recovery; it is required to tackle long-standing problems. Labour needs to be thinking now about how to promote growth in the medium-term through structural change in the economy. A fully-fledged British Investment Bank should be part of its package.

Tony Dolphin is Chief Economist at IPPR

This piece forms part of Jon Cruddas’s Guest Edit of LabourList

Latest

  • Comment Europe McFadden’s appointment comes at a time of big opportunity for Labour on Europe

    McFadden’s appointment comes at a time of big opportunity for Labour on Europe

    Pat McFadden is taking over the Europe brief just at the time when the issue can work in Labour’s favour. Provided we hold to Ed Miliband’s decision not to cave in to the calls to offer an in-out referendum. Europe is again becoming toxic for the Tories. How Cameron must be looking back wistfully to that time when he told his party to stop banging on about Europe. That’s exactly what it is now doing. And it’s largely his own […]

    Read more →
  • Comment The Next Portillo Moment

    The Next Portillo Moment

    Undoubtedly the highlight of election night ‘97 was seeing Labour record the unlikeliest of victories where I live in Enfield Southgate. We did it through hard work, at the time all three Enfield seats were blue and though the Labour swing meant that Edmonton and Enfield North were going red regardless it took a special campaign lead by an extraordinarily good candidate in Stephen Twigg to record what was an iconic victory in the Party’s history. We held the seat […]

    Read more →
  • Comment The business backlash against Tory EU exit plans 

    The business backlash against Tory EU exit plans 

    It’s not just José Manuel Barroso who has warned David Cameron that his party is taking the wrong approach when it comes to talk of an EU exit. There is a clear sense of concern and anger from the UK and international business community in respect of the Tory plans for an in/out referendum on the UK’s membership of the EU in 2017. This has led to a serious business backlash against the Tories. Standard & Poor’s, the international rating […]

    Read more →
  • Featured Miliband sets out 5 point immigration reform plan (but won’t join “Operation Pander”)

    Miliband sets out 5 point immigration reform plan (but won’t join “Operation Pander”)

    Ed Miliband is in Rochester today, where he’s campaigning for the party’s by-election candidate Naushabah Khan against what he called the “two Tory opponents” of UKIP and the Tories in the Rochester and Strood by-election. But the main purpose of Miliband’s speech was to set out what Labour’s approach to immigration will be – specifically an Immigration Reform Bill in the first Queen’s Speech of the new Parliament. Miliband announced it’d be based around five key principles (most of which […]

    Read more →
  • News Sadiq Khan asks Mansion Tax critics – how would you fund the NHS?

    Sadiq Khan asks Mansion Tax critics – how would you fund the NHS?

    Since Labour conference, the majority of Labour’s potential London mayoral candidates have been critical of the party’s Mansion Tax proposals. However one presumptive candidate has been consistently positive about the plans – Sadiq Khan. That’s understandable and expected, as he’s a Shadow Cabinet member and a Miliband loyalist. But Khan has now launched a public defence of the tax (calling it “absolutely fair”) and a broadside against critics, asking them “why they are opposed to hiring thousands more nurses and doctors […]

    Read more →