Britain’s economy: How is it really doing? | The Economist


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The Bank of England in Threadneedle Street, Lo...

The Bank of England in Threadneedle Street, London. Deutsch: Sitz der Bank von England in der Londoner Threadneedle Street. (Photo credit: Wikipedia)

This is an excellent, MUST READ, article in the Economist.

via Britain’s economy: How is it really doing? | The Economist.

A brutally frank and harsh summary might read:

It’s still the banks stupid!

Bank finance to businesses is one of the fundamental weaknesses of the UK economy. Business funding is required to finance investment and growth, in an increasingly globally competitive market place.

The article highlights how business finance is still seriously depressed across important sectors.

Banks prefer the simplicity, profitability and low risk of consumer finance, especially domestic property mortgages which now have Government guarantees. All of these loans are easy to service, with credit scoring and relatively junior call-center staff. Of course, the Economist article recognizes that real growth cannot be generated from consumer finance alone.

Meanwhile, business finance requires greater expertise to analyze business plans, risk analysis and commercial judgement. Speak to any small business owner about their experiences since 2008, and they will tell you that the banks are excessively conservative, putting too much weight on rules and regulations and not enough on knowing the client and the client’s business.

Being candid, another robust view to summarize UK bank commercial lending might be:

Commercial departments of banks are full of bureaucrats, with no knowledge of their customers nor their businesses and very little authority to back their judgement.

The Economist rightly concludes that Mark Carney, the new head of the Bank of England must give urgent priority to commercial lending.

However, I feel that the Chancellor of the ExchequerGeorge Osborne has been seriously remiss too. There is an overwhelming economic case for the Government to deploy fiscal tools to get businesses growing again. For example, capital spending should be 100% deductible, with a multiplier. For example, a £100,000 investment in year 1, could  generate a tax deductability of say £200,000 or £300,000 against profits in year 1. Similarly, special fiscal incentives are required to stimulate language training, especially Mandarin.

Let me conclude by asking two open questions:

  1. Do you agree that commercial departments of banks are full of bureaucrats, with no knowledge of their customers nor their businesses and very little authority to back their judgement?
  2. How do you suggest that the BoE and the Chancellor stimulate growth in UK businesses, especially small and medium-sized businesses?


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3 responses

  1. Pingback: A Very Hard Look at UK Welfare: Response to NEF Research – John Gelmini « Dr Alf's Blog

  2. Pingback: Some thoughts on the Britain’s Eonomy via The Economist – john Gelmini « Dr Alf's Blog

  3. The answer to Dr Alf’s first question must be a resounding yes.

    The old Captain Mainwaring (Based on the Dad’s Army television character), style bankers who knew their personal and business customers intimately have all gone to the corporate graveyard, having effectively been made redundant more than 30 years ago.

    In the days when it was possible for a small business owner to talk about “floorboard money” or use a crowbar like gesture to signal that there were more assets than the accounts showed, the old style bank managers were masters of realpolitik and could exercise seasoned judgement.

    Now, with points system scoring and HMRC cracking down on little people whilst leaving people like Vodaphone, Eon, Arcadia Group PLC, Glaxo Smith Kline, BT PLC, Guardian Media Group PLC, Tesco PLC alone, we have a situation in which SMEs are denied credit and put through the HMRC “olive press” for even minor indiscretions.

    Dr Alf’s prescription, plus more export led growth, infrastructure bonds, more enterprise and the active encouragement of wealthy foreign investors is the way forward coupled with a cessation of all overseas aid including the £1 billion gbp we have given to Nigeria to help them put a man into space and the £1 billion gbp a year we give to India, which they say they do not need.

    Fracking, a concerted blitz on the costs of local and central government building roads and nuclear power stations, and a switch from warmongering to airport capacity building and encouraging foreign banks to compete with our moribund High Street Clearers would also help.

    The Economist is right to take the Coalition to task for allowing commercial lending to be strangled whilst pouring money into the UK housing market to make consumers feel good just before the election.

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