April 22 (Bloomberg) -- Chancellor of the Exchequer George Osborne intends to unveil the second phase of a plan to increase loans for small companies and consumers because the U.K. economy remains weak, said a person with knowledge of the plan.
Osborne may extend the Bank of England’s Funding for Lending Scheme as soon as this week, said the person, who declined to be identified because the measure hasn’t been officially announced. The International Monetary Fund, whose delegation will visit London next month for an audit of the U.K., has called on him to do more to aid the economy.
Osborne’s growth offensive coincides with a renewed test of his economic stewardship as data due this week shows if the U.K. has escaped another recession, just days after the country lost its AAA grade from a second ratings company. On Friday, Fitch Ratings cut Britain by one level to AA+ and predicted that debt will peak above 100 percent of gross domestic product.
“Part of the reason for that is that the U.K. economic recovery has been weak -- almost nonexistent,” Fitch analyst David Riley told Sky News yesterday. “The chancellor is caught between a rock and a hard place.”
Investors often ignore ratings companies, evidenced by a drop in gilt yields since Moody’s Investors Service downgraded the U.K. to Aa1 from Aaa on Feb. 22.
While the median forecast of 37 economists surveyed by Bloomberg News is for the economy to have skirted a slump and expanded 0.1 percent in the first quarter, Bank of England policy maker Martin Weale said on April 18 that he wouldn’t be surprised if GDP fell. The Office for National Statistics will release the data on April 25 in London.
The GDP report follows a week of scrutiny of Osborne’s policies after he rejected a call from the IMF to rethink the pace of his budget squeeze.
Osborne said that he has already put in place policies to support the British economy, hitting back at recommendations from the IMF’s chief economist, Olivier Blanchard, who last week called for a “reassessment of fiscal policy.” When asked by reporters in Washington whether he would heed that, Osborne said that “it depends on whether you agree with the advice.”
“The IMF, which George Osborne has relied upon very heavily in supporting his proposition, said last week that he was playing with fire,” former chancellor Alistair Darling, Osborne’s predecessor, told Sky News. “The big question is, how long does the present government simply lumber on hoping that something will turn up?”
Osborne has been relying on Bank of England measures to aid the economy during his austerity drive. The FLS program, introduced last August, allows banks to borrow treasury bills from the central bank to fund lending. They currently have 18 months to use the facility and as long as four years to repay. Only banks with access to the bank’s discount-window facility can use the program, which accepts the same collateral.
The FLS extension might be used by Osborne to show the IMF delegation that he is taking steps to aid growth without abandoning his austerity plans. Osborne can also cite a separate Help to Buy program, where the government underwrites downpayments on homes, as evidence that he is taking steps to support the economy.
“The big test isn’t so much what the IMF say, but what the markets say,” Mark Field, a lawmaker in the governing Conservative party, told Sky News. “We’ve kept our interest rates very low and the lesson from 1931, from 1976 is once you lose market sentiment then really all is lost.”
Pressure on Osborne may persist in the run-up to local elections on May 2. An analysis by two professors at Plymouth University in the Sunday Times yesterday suggests the opposition Labour party will gain 350 local council seats, while the Conservatives will lose 310 and their Liberal Democrat coalition partners will lose 130.
“We haven’t really strongly enough communicated the fact that this government has achieved the things that it set out to do, which is to get a country living within its means,” government minister Sayeeda Warsi told Sky News.
An Opinium Research poll in the Observer yesterday suggested that Labour may also be struggling to attract support. The party would currently get 35 percent of the vote, one of the lowest readings since Ed Miliband became Labour leader, according to the newspaper.
The Conservatives had 29 percent their Liberal Democrat coalition partners had 8 percent, and the U.K. Independence Party had 17 percent. Opinium questioned 1,969 adults for the poll from April 16 to April 18.
To contact the reporter on this story: Gonzalo Vina in Washington at email@example.com