Osborne Extends BOE Lending Program With Focus on Small Firms

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U.K. Chancellor of the Exchequer George Osborne extended the Funding for Lending Scheme for another year and focused it solely on boosting credit to small and medium-sized businesses.

The Treasury and the Bank of England said the program will now run until January 2016, with incentives for lending to large companies removed. BOE Governor Mark Carney said the FLS supported credit during an “exceptional period,” though it is right to streamline it now to concentrate on smaller companies. Osborne will announce further aid to small businesses in his end-of-year outlook to Parliament today.

“Now that credit conditions for households and large businesses have improved, it is right that we focus the scheme’s firepower on small businesses, which are the lifeblood of our economy,” the chancellor said.

With just over five months to go before the election, Osborne is seeking to convince voters his Conservative Party is the best placed to maintain the recovery as the embattled euro area casts a shadow over Britain’s growth prospects. Osborne is set to increase his forecasts for government borrowing, economists say.

The extended FLS will be restructured to only provide incentives linked to SME lending. It’s the second time Osborne and Carney have limited the program after they removed mortgage lending late last year to restrain the property market.

“As the banking system has been returned to health, the need for that backstop has been reduced,” Carney said. It has been “tapered appropriately” and the extension “concentrates the FLS on the one area where support remains warranted.”

Lending Gap

While a booming housing market in recent years has boosted mortgage lending, small businesses continue to struggle to access credit. The gulf was underlined by BOE figures this month showing loans to small companies dropped an annual 2.1 percent in October.

The FLS, operated jointly with the BOE, was introduced in 2012 to cut borrowing costs for companies and consumers as Europe’s sovereign-debt crisis raged. It allows banks and mutual lenders to borrow Treasury bills from the BOE and use them as collateral to raise wholesale funds at discounted rates, providing they pass on the savings.

Measures to support small businesses in today’s Autumn Statement will include an additional 400 million pounds ($626 million) to extend the British Business Bank’s venture-capital program, and funding allowing it to guarantee 500 million pounds of new lending in 2015-2016, the Treasury said.

Tight Rate

Polls show Prime Minister David Cameron’s Conservatives are neck and neck with the opposition Labour Party, with neither set to gain a majority in May’s election. Osborne will have little room for giveaways today after announcing he’ll boost National Health Service funds by 2 billion pounds earlier this week.

More than four years after Osborne took office pledging to all but erase the deficit by 2015, the U.K. is still on course to borrow about 100 billion pounds in the current fiscal year, or almost 6 percent of gross domestic product.

With low-paid work accounting for many of the 1.8 million jobs created since 2010 and wages under pressure, the economic recovery has failed to deliver the boost to tax receipts that officials had predicted.

According to EY Item Club, austerity is set to continue for another four years, with Osborne now on course to achieve his goal of returning the budget to surplus in 2019-20, a year later than the Office for Budget Responsibility forecast in March.

“David Cameron and George Osborne have now failed every test and broken every promise they made on the economy,” Labour’s finance spokesman, Ed Balls, said in a statement. “This cost-of-living crisis is why the chancellor will have to admit he has broken his promise to balance the books by next year.”