Investing for the future: Ambitions for the British Investment Bank
The Business Secretary, Vince Cable, has expressed his support for a government-backed business bank to boost lending to small UK businesses, while admitting that the scale of its operations would have to be agreed with the Chancellor. In a just published IPPR report (funded by the TUC), my former colleague David Nash and I argue that such a bank – which we call a British Investment Bank (or BIB) – should be ambitious in scope.
We looked in detail at three other national investment banks – the German KfW, the Brazilian Development Bank and the US Small Business Administration – and utilised other studies that have consider the Nordic Investment Bank (NIB) and the European Investment Bank (EIB) to draw up a blueprint of what a BIB might look like. Importing any one of these models wholesale would not be the best approach; each has developed alongside the institutional structure of the country (or countries) in which it operates. But they offer plenty of lessons for UK policymakers.
The BIB should be 100% state-owned. It would be profit-making – though not necessarily profit-maximising – but it would not pay a dividend. Profits would be ploughed back into the Bank to allow it to further increase its lending.
The remit of the BIB should be to tackle two long-standing problems faced by the British economy: a tendency to invest less in infrastructure (as a share of GDP) than comparable countries and a shortage of financing, particularly long-term financing, for small and medium-sized businesses.
Like the Green Investment Bank, the BIB would need to secure EU state aid approval. While this would not be easy, those who argue that there is no point in even developing the idea of a BIB because it would be shot down by Brussels are wrong. The state aid rules are not written in stone. They are designed to prevent governments giving companies in their countries an unfair advantage, not to be a barrier to growth – or to an institution that would support growth.
Getting state aid approval could however be a slow process, so it should be clear that the rationale for the BIB is not to help get the economy out of the double-dip recession but to improve its medium-term growth prospects. For the same reason, the capitalisation of the BIB, and its ability to raise funds in the capital markets, should not be seen in the context of the current fiscal debate.
That said, the government would have to provide the new Bank with its initial capital. One option would be tell the Bank of England to do another round of quantitative easing specifically for this purpose. Alternatively, the funds would have to be found by cutting other spending, increased taxation, the sale of government assets or extra borrowing. In our paper, we suggest the BIB should have an initial capital injection of £40 billion, spread over four years (£10 billion a year is a little less than the amount the Coalition has cut its capital expenditure by in the current spending round). If, like the EIB and the NIB, the BIB was allowed to raise £2.50 on the financial markets for every £1 capital, this would mean it could have a balance sheet of £140 billion after four years.
Would this be enough to make a big difference to the UK economy? It is hard to say with any certainty. Demand for funding by the BIB would only become clear once it was operational. But £140 billion is around 9% of UK GDP – and roughly one-third of the size of the EIB’s balance sheet – and so would seem to be a good initial target.
At this scale, the BIB would be far larger than the Green Investment Bank, which will have an initial capitalisation of £3 billion and will not be able to borrow money at least until the government’s debt ratio is on a downward trajectory (because its activities count as part of the public sector and therefore affect the Chancellor’s ability to hit his fiscal target).
But there is a qualitative difference between the government borrowing because its current spending commitments are greater than the sum it is prepared to raise in taxes and a BIB raising funds in asset markets to use to finance infrastructure projects that will generate a stream of income in the future, or to lend to small businesses. A British Investment Bank should not be held back by the vagaries of the UK’s accounting practices. Its activities (and those of the Green Investment Bank) should be excluded from the government’s target fiscal measures and it should be free to raise funds up to a pre-determined leverage ratio
The Coalition is fixated on measures that will get the economy growing again in the short-term; the BIB does not fall into that category. But the government should also be thinking about how to promote growth in the medium-term through structural change in the economy. A fully-fledged British Investment Bank should be part of its package.