My Lords, net lending by banks to businesses in the United Kingdom has been on a downward trend since the end of 2008, with debt repayments exceeding new lending. Access to finance is essential if businesses are to invest, grow and make their important contribution to supporting the economic recovery. On 26 July, the Government published a Green Paper on business finance to help to inform and take forward their agenda on credit and other sources of finance for businesses.
I am grateful to my noble friend for that reply. He clearly acknowledges that most British businesses, large or small, need the revived availability of bank lending on reasonable terms to grow and flourish, coupled preferably with a more stable and promising macroeconomic outlook and confidence inspired by the Government’s determination to reduce the deficit and reinvigorate our export trade, as the Prime Minister is doing in India today.
My Lords, indeed, I do agree with my noble friend. What a surprise. The Government recognise that access to finance is absolutely critical for businesses to survive and grow and that small and medium-sized companies face particular challenges. We need a recovery led by sustained expansion in the private sector and, in particular, by growth in business investment, seizing the opportunities presented by a recovering global economy, which is at the heart of the Prime Minister’s visit to India this week. The Government agree that we must continue to support British businesses when they are ready to export and will continue to look, in particular, at the services provided by UK Trade & Investment and the Export Credits Guarantee Department, both of which have shown a significant increase in their export support during the past year.
My Lords, could the Minister clarify the Government’s policy in this regard? Does he accept that the global banking crisis stemmed from banks lending and creating bad and doubtful debts, which were then packaged up and called derivatives, or toxic debt? The Government now want the banks to start lending more. How are they proposing to do that?
My Lords, the first thing that we have to do is to recognise that the reason why both the Government and the banks were overleveraged, let alone investing in inappropriate products, was at heart a failure of regulation. So the first step that we have taken is to completely overhaul the financial regulatory system to make sure that banks do not get the country into the financial stability crisis that we inherited. The second thing that we have to do is to make sure that banks are enabled to rebuild their capital base so that they can have a secure capital base on which to lend to small and medium-sized businesses in particular. We have set out a range of measures on that, including in the Budget and the Green Paper earlier this week.
My Lords, is my noble friend not concerned that the massive increase in quantitative easing has not been reflected at all in the figures for the money supply, which has actually gone down? It is not surprising that the banks are not lending more if the money supply is declining. What does my noble friend think ought to be done about this?
My Lords, my noble friend has raised this theme on a number of occasions. It is for the Monetary Policy Committee of the Bank of England to decide how it operates the asset purchase facility—so-called quantitative easing. What we are talking about this morning is how we increase the supply of net lending by banks to United Kingdom businesses. As I said, the Government announced in the Budget a range of measures and have set out an important discussion document, to which I hope noble Lords who wish to will contribute their views by 20 September.
My Lords, the Minister has referred to the Green Paper on two occasions. Is he aware that an official identified it as very green because it reflected the inability of the Business Secretary to convince the Chancellor to adopt a more constructive approach to this issue? Does this not reflect usual tensions within the coalition? Does the noble Lord also recognise that the Budget has been received in such a way as to reduce the level of demand in this country rather than increase it?
My Lords, it is not very productive to reduce everything to trying to find chinks of light between different parts of the coalition. It would be more helpful to have a substantive discussion about the Green Paper. It was published under the joint signatures of the Secretary of State for Business, Innovation and Skills and the Chancellor of the Exchequer and sets out a wide-ranging agenda of possible measures to increase lending to business. As I said, I encourage anybody with views on it to contribute to the debate over the summer.
My Lords, the noble Lords, Lord Roberts of Conwy and Lord Higgins, raised an important question about the effectiveness of monetary policy which requires an answer from the government Front Bench. Given that the growth of M4, which is the best measure of bank lending, has fallen from 16 per cent to 3 per cent over the past two years, what confidence can the Government have that further quantitative easing will be able to offset the deflationary impact of the planned cuts in public spending? This is not a matter for the MPC; it is a matter for the Government.
My Lords, I will be brief. I would say that the best indicator of the state of bank lending is to be found in the Bank of England’s July Trends in Lending document, which shows that in 2009 bank lending decreased by £45.6 billion and in January to May this year by £11.1 billion. I suggest that the proof of the pudding is in the eating.