£20bn credit easing plan is Osborne’s ‘game-changer’

By Alex Stevenson

The government will prop up banking loans to small- and medium-sized firms by up to £20 billion as part of renewed credit easing efforts, the chancellor has confirmed.

George Osborne said the move would use the government's credit-worthiness to underwrite banks' borrowing on money markets, opening up more loans to the struggling firms critical to Britain's future economic growth.

Treasury sources called the national loan guarantee scheme a "game-changer", but the opposition said it showed the coalition's past attempts to get banks lending again had failed.

Firms with a turnover of less than £50 million will be eligible for the extra cash. It mirrors the credit easing scheme launched by Labour after the 2008 financial crisis and one currently operated by the EU-run European Investment Bank.

The government is only liable if the banks offering the loans collapse. This means the extra borrowing will not appear on its balance sheets, helping Mr Osborne's claims about progress being made on drawing down the deficit when he makes his autumn statement on Tuesday.

"There are many governments that couldn't operate a scheme like this because they couldn't be regarded as credit-worthy enough to do this," Mr Osborne told BBC1's The Andrew Marr Show.

"I think this is relatively low risk for the government given the strength of our balance sheets and our low interest rates. The banks are ultimately carrying the credit risk of the loans to the small business."

A company borrowing £5 million could see its interest rate cut from five per cent to four per cent, opening up an extra £50,000 of cash.

Labour said the announcement showed the chancellor's flagship Project Merlin deal, which saw banks handed a tax cut in return for a commitment to increase lending, had failed.

Shadow Treasury minister Chris Leslie commented: "If it doesn't live up to the hype and fails to quickly deliver extra lending and on better terms to small businesses it will be yet another blow to struggling firms."

Autumn statement details unveiled

The national loans guarantee scheme is the largest of a series of measures set to be unveiled in full by the chancellor in Tuesday's autumn statement to the Commons.

Today Mr Osborne confirmed a deal has been signed with major pension funds securing their investment in British infrastructure projects.

The government is also expected to take a stake in a fund to be launched next year providing the credit alongside private sector investors for medium-sized loans.

Companies will be encouraged to sell bonds to the market in a scheme run for the next two years.

Mr Osborne is also expected to cap the increase in rail fares, which will increase by 6.2% instead of 8.2%.

Tuesday's statement will see an update from the independent Office of Budget Responsibility on the prospects for Britain's GDP growth – and the coalition's progress as it seeks to reduce the deficit.

The chancellor struggled to answer a question about whether he would succeed in removing the structural deficit within five years.

Instead he sought to offer reasons for the headwinds faced by the UK economy, whose high unemployment and muted growth is pushing up welfare bills and reducing tax receipts for the Treasury.

"We have a slowing world economy, a financial crisis brewing in Europe and a concern about governments' ability to pay their debts," he added.

"We have got to earn our credibility. We are not facing the same kind of borrowers' strike you get in other European countries at the moment, because of the credibility we've earned."

Earlier shadow chancellor Ed Balls, appearing on the same programme, had said "billions and billions of pounds" more was being borrowed than planned by Mr Osborne "because unemployment is going up and his plan has failed".

Mr Balls said the IMF had made clear that if the economy undershot its growth plans the "sensible, balanced thing to do" would be to slow the base of cuts.

With the coalition showing no sign of conceding that this step is necessary, he warned: "I'm deeply fearful about what this will mean for growth, for jobs, for deficit reduction in the next few years."

Mr Osborne insisted: "We have got a deficit reduction plan that has brought us record low interest rates [and] earned us that triple-A credit rating.

"We are absolutely going to stick to that plan, because that is what is helping Britain weather this international debt storm and is helping us lay the foundations of a stronger economy."