George Osborne floats small business lending scheme

Similar schemes have worked in Germany and US but critics fear more ‘zombie’ businesses

LAST UPDATED AT 09:00 ON Mon 3 Sep 2012

CAN George Osborne help the small businesses he calls "innocent victims of the financial crisis", even as UK economic output is forecast to shrink further?

Measures announced were short on specifics but after the failure of three previous attempts to get banks to lend, the Chancellor has little choice but try to thaw the credit freeze with a new approach.

What he has in mind is a small-lending system back-stopped by the government. According to the Financial Times, similar schemes have worked well in Germany, where Osborne’s team studied the German Kreditanstalt fur Wiederaufbau (KfW) and the US, where the Small Business Administration (SBA) lent more than $30 billion to 61,000 companies in 2011.

Supporters of the SBA tell the Wall Street Journal that small businesses account for half of US employment and have created two of out three net new jobs between 1993 to 2009.

Critics of the agency counter that the system of loans does more harm than good, since they go to only a tiny fraction of the small businesses and amount to an unfair subsidy for businesses that may not be worthy of a commercial bank loan.

But that could still be better than current trends in Britain, where economists are puzzled by weak output coupled with relatively robust employment, says the FT. The relatively low number of company failures is (again) blamed on banks that prefer to keep low-productivity "zombie" businesses going than allowing the firms to go to the wall and booking the bad loans.

Investors say keeping zombie firms on a financial drip actually stifles new investment. But the zombie theory still can’t explain why UK employment actually rose about 0.7 per cent in the second quarter while measured output fell about 0.5 per cent. · 

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