Nov. 27 (Bloomberg) -- Chancellor of the Exchequer George Osborne said the U.K. government will guarantee 20 billion pounds ($31 billion) of loans to small companies to jump start a British economy that is at risk of stagnating.
The National Loan Guarantee Scheme -- an insurance program to underwrite money raised by banks in wholesale markets -- may be expanded to “up to 40 billion pounds” Osborne said today.
The plan allows for “the government which can borrow money very cheaply to help small businesses borrow money more cheaply than they do at the moment, so the government will underwrite the loans in order to cut the interest rates they pay,” he said in an interview on the British Broadcasting Corp.’s “Marr” program.
Osborne is seeking ways to stimulate the economy which he suggested today may grow by no more than 1 percent this year, lower than a 1.7 percent March estimate. He said he would tap billions of pounds held by pension funds to help build roads, rail lines and other infrastructure projects.
“The economic situation facing many countries is going to be very difficult,” Osborne told the BBC. Forecasters “are all saying the same thing: that the British economy has slowed.”
The loan guarantee plan mirrors practices used by the European Investment Bank and Germany’s KFW Bank GmbH. U.K. banks have been reluctant to lend since the 2008 financial crisis or have done so at onerous interest rates to offset higher funding costs.
The U.K. plan, available to companies with less than 50 million pounds in annual sales, would reduce loan costs to about 4 percent instead of the 5 percent currently provided by commercial banks, a person familiar with it said yesterday. It would guarantee over 10 billion pounds, rather than 20 billion pounds, the person said.
Banks rather than the government will chose to whom they lend, although the government will demand lenders use the program, which will run for two years, to ensure companies benefit, said the person, who declined to be identified as the plans aren’t yet public. The program will start operating early in 2012.
Osborne is facing growing pressure to stimulate growth amid a slowdown triggered in part by the debt crisis in Europe. He has identified easier credit as a key policy lever to supplement the Bank of England’s 275 billion-pound quantitative-easing program, whereby the central bank creates money to buy government bonds.
He will reduce the Bank of England’s Asset Purchase Facility -- another credit easing plan introduced by the previous Labour government which the central bank has not made use of -- to 10 billion pounds from 50 billion pounds, according to the person. That extra 40 billion pounds creates room for the Treasury’s new plan.
Osborne today repeated his view that the U.K. economy is being hurt by the sovereign debt crisis, a claim his Labour Party counterpart Ed Balls said was being made worse by the severity of the government’s austerity measures.
Osborne “said a year ago that if we had faster cuts it would lead to private sector jobs, to confidence, to falling unemployment but it hasn’t worked,” Balls told the “Marr” program. “That has been the fantasy they have peddled for the last year. It was his decisions that choked off the economy.”
The deteriorating outlook means Osborne will have to cut spending by more if he is going to meet his deficit targets. The ITEM Club, a private forecasting group, said today about half a million jobs will need to go in the public sector, 100,000 more than planned.
Osborne said he is confident that he will adhere to rules to eliminate the structural budget deficit by the fiscal year that ends in April 2016 and have debt falling, vowing to “do what it takes” to make it happen.
“I am confident we are going to meet the targets we have set out,” Osborne told the BBC. He wouldn’t deny that he may fail to meet the deficit target a year early as he said he would last year.
--Editors: Mike Harrison, Sharon Lindores
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