Government response to economic crisis questioned

MPs question whether the government's stimulus package can revive the economy

28 January 2009 10:06

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In a report published today, the Treasury Select Committee says that the bank recapitalisation programme announced in October had not boosted lending, and could actually be undermining the ability of banks to lend because of the onerous terms of the agreement.

The committee also warned there is a risk that Britain could fall into a "self-reinforcing deflationary cycle".

The MPs said the shortage of bank credit was "the single most critical problem" currently facing the economy and described the measures from Chancellor Alistair Darling's November Pre-Budget Report (PBR) as "piecemeal".

Business lobby groups welcomed the committee’s call for the government to continually review its measures designed to increase bank lending.

"Despite this government intervention, the early indications are that small businesses are still being bracketed as risky propositions, often regardless of how well they are performing in difficult conditions," said the FPB’s Chief Executive, Phil Orford.

"The Treasury Committee has concluded that access to finance is the single most critical issue facing businesses in the UK.

“Many of our members continue to struggle because the banks are still not lending to adequate levels, and it is right that the government, the small business lobby and the banks themselves scrutinise the effectiveness of these schemes in order to do more where it is needed."

The report also called on the government to note the difficulties faced by many retailers in implementing its 2.5% cut in VAT, which was another measure announced in the PBR.

"Small businesses need significant tax relief, not half measures that many smaller retailers found impossible to pass on because of the administrative costs involved and the short time they were given to implement the change," said Orford.

The FPB is calling for small firms’ corporation tax to be cut to 21%.

“The government must address the stranglehold of unnecessary regulation that prevents many business-owners from running their companies as effectively as they could," he added.