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 UN report shows we must take bold action on climate change

    UN report shows we must take bold action on climate change

    The Fifth Assessment report from the United Nations’ Intergovernmental Panel on Climate Change (IPCC) could not be clearer. Catastrophic climate change can be prevented if all countries, rich and poor, make the transition to a low carbon economy, and that this can be achieved without damaging economic growth. The IPCC has provided overwhelming and compelling scientific evidence that climate change is real, that it is caused by human activity and that it will have disastrous consequences if urgent action is […]

    Read more →
  • Comment Scotland From food banks to fair pay

    From food banks to fair pay

    We all know that politicians love to talk about ‘fairness’.  Hardly anyone will disagree that people should be paid fairly for the work they do.  But scratch beneath the surface, and there are big political differences. In today’s Britain, hundreds of thousands of people don’t earn enough to feed their families without turning to food banks.  New figures released today by the Trussell Trust show that in 2013-14, their food banks gave emergency food supplies to over 913,000 people.  This […]

    Read more →
  • News Diane Abbott publicly attacks Ed Balls

    Diane Abbott publicly attacks Ed Balls

    Former shadow health minister Diane Abbott has taken to The Guardian website to launch a fairly scathing attack on the economic direction of the Labour leadership. The famously outspoken backbencher warns that if Labour “accept the coalition cuts agenda” they will not last more than a term in office. Abbott says: “Balls has a plan. He just does not feel able to spell it out to party members. It is called embracing Tory austerity.” Interestingly, no mention is made of […]

    Read more →
  • Featured The proof that Clegg’s taxpayer-funded aide is Lib Dem election strategist

    The proof that Clegg’s taxpayer-funded aide is Lib Dem election strategist

    Yesterday LabourList reported the accusations that Nick Clegg was paying his aide, Ryan Coetzee, £110,000 of taxpayers’ money to be a Lib Dem election strategist, rather than a Government aide. Today we can show you powerpoint slides, prepared by Coetzee, that prove he is doing partisan work for the Liberal Democrats. The slides, bearing the Lib Dem logo, show polling figures for the public’s feelings about the Coalition, Clegg and whether people would consider voting Lib Dem. Damningly, one slide […]

    Read more →
  • Comment Five reasons why Labour is likely to win the next general election

    Five reasons why Labour is likely to win the next general election

    On Monday this week, YouGov President Peter Kellner wrote about the ‘fundamentals that favour Cameron’ being re-elected PM in 2015. He lists some fair points, though I’ve argued before that Mr Kellner can be a bit selective in how he presents public opinion. So let me offer you a counter-point: the fundamental factors that favour Ed Miliband and the Labour party in 2015. These are the reasons why I think Labour will emerge as the largest party after the General Election […]

    Read more →