Editorial Monday 3 October 2011: Osborne's back-door Plan B is the new PFI

The man with the most important job in Government spoke to his party today, and said ... there will be no change of policy on the deficit.


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Financial markets will like that about Mr Osborne's speech, being as they are surprise-averse. It won't be possible to disaggregate market reaction to the speech from the news that Greece is having trouble meeting its austerity cuts to trigger the next bit of loans.

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But what's curious is that the Chancellor made a slightly oblique announcement of new borrowing.

As well as the inevitable 'Eric Pickles is fat' joke, there was new material in the form of 'credit easing'. The media are being briefed that Osborne's allusion to 'credit easing' means a new scheme for lending to small businesses.

This is intriguing, both economically and politically.

The first reason it's intriguing is that someone is going to have to make a decision to which companies this scheme should make funds available. I thought that Conservatives did not believe in government picking champions?

The cancellation of the Sheffield Forgemasters loan was meant to be a bellweather of that approach, wasn't it?

The second reason is that much as the Tories poked fun at Labour leader Ed Miliband's idea that he can differentiate 'good' and 'bad' capitalists, that is a comparable aim to what this scheme promises to do in economic terms. It promises to distinguish the creditworthy from the un-credit-worthy.

The Conservative briefing to The Guardian liveblog outlines some details: "It is similar to the national loan guarantee scheme advocated by the Tories when they were in opposition. IIt will involve the Treasury lending billions of pounds. The sums involved could run into the tens of billions. 'Credit easing' involves the Treasury lending to small firms by buying corporate bonds.  In the medium term the Treasury want to use "credit easing" to develop a new loan market for small and medium-sized enterprises in the UK".

Credit easing - son of PFI
The cat emerges from the bag when it reports, "'Credit easing' will not add to the deficit because the Treasury will be buying assets (bonds).  The government will have to borrow to fund the scheme. But that money will no count as borrowing because it will be secured against assets".

It's secured but off-balance sheet borrowing, in other words - done in a manner that is unmistabkably backed by Government in the event of catastrophe.

Great going, chaps: we have a successor to PFI.

This is an awfully long way to go around the problem of lending to small businesses, given that the Government owns a major bank.

The briefed proposals that "the Treasury will take charge of 'credit easing' because it is not appropriate for the Bank of England to be lending directly to firms in this way (and Ministers will not be involved in the decisions about where the money goes.  It will be managed at arms length, by the creation of an arms-length company or by the Bank of England acting as an agent for the Treasury" offer only a fig-leaf of cover. The appointments to head this new bureaucracy will be as political as they come.

The FT Westminster blog coverage points out that going to bond markets requires a government to be in the market for enormous sums of money.

Is the desire for so much credit there, to justify this approach?

As ever, Faisal Islam's blog for Channel 4 news on this subject is worth reading.