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Civitas - Boost productivity with a new national investment bank
A state-backed investment bank should be set up to plug the shortfall in lending to small and medium-sized businesses and help tackle the challenge of poor productivity in the UK, a new Civitas report urges.
Investment in the UK has fallen from about a quarter of GDP in 1990, when it was broadly in line with that of other developed economies, to just over 16 per cent – well below that of most advanced economies.
This is in part driven by the market failure described as the patient capital or finance gap, which sees banks failing to invest in SMEs, even when there is demand from creditworthy businesses, due to access to easier returns from alternative investments.
Loans to business by banks as a proportion of their domestic lending have declined from 31 per cent in 1988 to eight per cent in 2016. Lending to business accounts for only five per cent of UK banking assets compared with 14 per cent of eurozone banking assets.
In Closing the Finance Gap, Civitas economist Justin Protts proposes the creation of a new investment bank to address the market failure that has led to this lack of patient capital for SMEs. The bank could be independently-financed at no on-going cost to the taxpayer while significantly boosting current low levels of investment and so help to raise productivity.
Various countries, including the UK, have or have had national development and investment banks and agencies which have been set up to address these issues. The report draws on the experience of some of these, such as:
- The Industrial and Commercial Finance Corporation, a UK institution founded in 1945 but which no longer exists as it was created.
- Germany’s KfW, which in 2016 had a financing volume of €81 billion of which €21.4 billion of financing was for the promotion of SMEs.
- The US Small Business Administration, which approved lending to small businesses of almost $29 billion of lending in 2016.
- The European Investment Bank, which invested €6.9 billion in the UK in 2016.
Protts shows how a new national investment bank could provide a sustainable source of patient capital and in doing so helping to tackle the UK’s underlying productivity and investment problems.
‘The UK economy is not operating as it should. The output of each worker is barely increasing and failure to increase our productivity since the financial crisis has been holding back growth, ‘ he writes.
‘There is no doubt that low investment, particularly in enterprise, is a cause of the UK’s current economic woes and a significant part of that problem is the failure of the banks to lend to SMEs, which make up 99 per cent of businesses in the UK.
‘The experiences of institutions elsewhere, particularly of Germany’s KfW and the US’s SBA, show that government-owned investment institutions can play an important role in providing the sort of business investment the UK is lacking and at no on-going cost to the taxpayer.
‘The current British Business Bank does incredibly little to support business when compared with development banks in Europe, and is not fit for purpose.
‘If the government is going to seriously tackle the challenges of low investment and productivity then they must go further and create a new UK investment bank which can be mandated to provide the longer-term finance needed by SMEs to invest, grow and increase the UK’s productivity.’
Closing the Finance Gap: How a national investment bank could support enterprise and raise productivity
