UK Government Seeks Boost For Growth In Credit Easing Package
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04:34 PM
LONDON -(Dow Jones)- The U.K. government Tuesday will set out a range of schemes designed to revive growth in an already weak economy that now faces a number of headwinds from the euro zone, including the prospect of falling demand for its exports and reduced access to affordable funding for its banks.
However, the government’s room for maneuver remains tightly constrained, with bond investors likely to be spooked by any suggestion that it is easing back on an austerity program designed to halt the rise in its debt by the middle of this decade.
Presenting his Autumn Statement to lawmakers, Chancellor of the Exchequer Gorge Osborne will focus on providing a type of stimulus known as credit easing, a counterpart to the Bank of England’s stimulus program, which is known as quantitative easing and involves buying government bonds using freshly created money.
The first form of credit easing, to be called the National Loan Guarantee Scheme, will see the government guarantee up to GBP40 billion of bank lending to small businesses.
“If you are a small businesses currently borrowing, for example, at 5% you may be able to reduce the interest rate to 4%,” Osborne said during an interview on the BBC’s Andrew Marr show. “If you have a GBP5 million loan that is GBP50,000 extra in cash flow, GBP50,000 to help you expand your business.”
Osborne said the government was initially making available GBP20 billion for the loan guarantee scheme, but that could be raised to as much as GBP40 billion. However, the chancellor emphasized that the money was in the form of guarantees, which meant the government would not need to borrow additional money to fund it.
Under a second scheme, the government will invest alongside private investors in a fund that will lend to small- and medium-sized companies. And a third scheme is also expected to be announced under which the government will buy corporate bonds from firms that struggle to secure bank loans.
Osborne also Sunday said the government had signed an agreement with British pension funds for them to invest in U.K. infrastructure projects.
The government is hoping to attract the private investors to invest in the program–which will involve construction, energy, road building and technology projects–by offering higher returns than U.K. government bonds. The yield on the 10-year gilt fell to a record low of 2.10% a week ago.
The Autumn Statement comes as increasing pressure builds on Osborne to unveil a decisive growth strategy that counters the threats that rising unemployment, weak consumer confidence and the euro zone’s debt crisis pose to the U.K. economy.
Alongside Osborne’s statement, the independent Office for Budget Responsibility will announce its projections for the U.K.’s economic growth and the governments borrowing requirements. It will also publish its judgement on whether or not the government is on path to meet its fiscal targets.
Economists believe the growth forecasts will be slashed to around 1% for 2011 and 2012 from the OBR’s March forecasts of 1.7% in 2011 and 2.5% in 2012.
Osborne Sunday acknowledged the difficult situation facing the U.K. economy, saying the euro-zone crisis and slowing global economy had clearly had an impact on the U.K.’s growth prospects and was a challenge for the country’s public finances.
“International bodies, forecasters in the private sector, they are all saying the same thing: the British economy has slowed,” Osborne said. “I’m not using that as an excuse, I’m using it as an explanation of why this is an exceptionally difficult time.”
Despite slowing economic growth, Osborne said he remains committed to the government’s key goal, which is to eliminate the structural budget deficit by implementing GBP111 billion of spending cuts and tax increases by 2015, adding the austerity measures had afforded the U.K. credibility and meant it had maintained its triple-A rating.
Alan Clarke, an economist at Scotia Capital, said there is almost no room for any relaxation of the austerity programme.
“The economy has taken a turn for the worse, but the Chancellor has precious little leeway to do anything about it. Hence this autumn statement is likely to be a fine-tuning exercise,” he said. “The only things that we can see provoking a substantial change of course will be a disaster in the euro zone, the U.K. outlook takes a substantial turn for the worse, or if the next election approaches. For now, it is steady as she goes.”
By Ainsley Thomson, Dow Jones Newswires; 44 20 7842 9318; ainsley.thomson@dowjones.com
(Alistair MacDonald contributed to this report)
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