Mr. Mark Hoban (Fareham) (Con): I congratulate the hon. Member for Solihull (Lorely Burt) on securing this debate. When she did so last week, she may have thought that this would be the only opportunity this week to discuss the issue, but events moved on, and we had an Opposition day debate in the House yesterday, and a statement this afternoon. Everything to be said may have been said, but certainly not everyone has said it, as I shall prove in a few moments.
The hon. Lady made some important points, but part of the challenge is that although the debate is about small businesses, large businesses are also facing cash flow problems, and there is a beggar-my-neighbour problem. A larger business facing similar challenges with cash flow and bank facilities may believe that the only way in which it can manage its cash flow is to sweat its debtors harder and make them pay faster, and to delay payment to creditors, as the hon. Member for Caithness, Sutherland and Easter Ross (John Thurso) mentioned from his business experience.
Lorely Burt: I am grateful to the hon. Gentleman for giving way so early in his speech. I completely understand where he is coming from, particularly in the light of the collapse of some huge organisations. When a bank collapses, one realises the precariousness of businesses at both ends of the spectrum.
My point, on behalf of small businesses, is that a larger business generally has a little more fat, but small businesses often live hand to mouth. Larger businesses can often absorb problems and cash flow difficulties, but they may be the end for small businesses if they are living hand to mouth. I am concerned for all businesses, but particularly small businesses.
The hon. Lady makes a fair point, but such problems are not limited to small businesses, and businesses across a wide spectrum will suffer. In my
constituency, a private business with more than 50 employees is classified as big. Fareham has a huge number of small businesses, and I know that they are going through some of those problems.
The right hon. Member for Makerfield (Mr. McCartney) mentioned Joanna Elson, and I am seeing her next week to discuss the Money Advice Trusts work. I welcome the fact that it has moved into providing advice to businesses. He and I, and other hon. Members have come across constituents who receive tremendous advice from the Money Advice Trust, citizens advice bureaux, and consumer credit counselling services. Their advice is often not to take on more debt, and how to manage finance better. That constructive advice is needed by small and medium-sized businesses and is a practical way in which to help them through the crisis.
I am aware that small businesses are facing high arrangement fees, that overdraft rates are rising from 10 to 15 per cent., and that facilities are being reduced and withdrawn, often at short notice. That is happening because of the credit crunch, because banks are hoarding their capital and rationing lending. Consumers have faced that problem during the past year, and more and more businesses are now facing it. Different banks act in different ways, depending on their strength. Some will be able to continue to lend, and I have heard examples of small businesses being refused facilities at one bank, and being granted them at better rates by another. There is an onus on businesses to shop around, but we see the impact of the credit crunch on the wider economy. In his speech in Leeds last night, the Governor of the Bank of England was very clear about that when he said that we are heading towards recession.
It is important that the Government consider ways to help small businesses and to ease their cash flow problems. We welcome the Governments measure to speed up payment to suppliers, and the NHS and other Government bodies are also being asked to do so. We have argued that companies should be allowed to defer their VAT bills. They would pay interest on that, but interest at 7.5 per cent. is a lot better than interest on an overdraft of 15 per cent. That would help.
Lorely Burt: The hon. Gentleman is being extremely patient, and I am grateful. I wanted to ask a question about VAT during the debate in the House last night, because I could not find the cost of that measure on the Conservative partys website. Although the Conservatives purport to have costed such measures, I could not see a costing or where they intend to find the money. I should be most grateful if he will enlighten me.
Mr. Hoban: This is a first. I have never heard a Liberal Democrat ask for the cost of a policy. Had I known that the hon. Lady would be so prudent about spending commitments, I might have asked her to cost her partys spending commitments. I do not have the figures to hand for every policy, but it is a reasonable way to help and encourage businesses. There is a cost attached, as there is to prompt payment.
Angela Eagle: It is kind of the hon. Gentleman to be so gracious, and I thank him. Is he saying that he does not know off hand the cost of the announcements that the leader of his party made? It is important to know how the Opposition propose to pay for the policies that they announce.
Our policy has been costed. We are a responsible Opposition, and we ensure that our policy proposals are properly costed because we know that the Government will scrutinise them, and we will not fall into the trap that they fall into of pretending that new money has been announced simply by rebadging it or bringing it forward.
Mr. Hoban: I knew in my bones that it was a bad idea to take an intervention from the right hon. Gentleman, whose remarks had been non-partisan, but he is now interested in roubles. I am sure that Lord Mandelson will be equally familiar with the cost of policies in roubles.
Another way in which to help small businesses is to reduce employers national insurance contributions by 1 per cent. for six months, which could be financed by the abolition of allowances elsewhere. Such measures would help to ease cash flow problems for small businesses, and that is what we want to do.
We have made other proposals to help small businesses. We know that some will need time to find refinancing. Their bank may have withdrawn a facility, but they may want to shop around, which is why we proposed some reforms to insolvency law to give a short breathing space to businesses, before they are put into administration, to help them to find that facility, and to provide greater protection for creditors who provide them with finance during that interim period. We do not want businesses to disappear or jobs to be lost unnecessarily, and it is important to provide a reasonable breathing space for businesses to find alternative facilities.
We must also consider the macro-picture. One challenge in the development of the crisis is that some of the rules governing the amounts that banks lend have encouraged excessive lending in the good times, and a contraction of facilities in the bad times. The Basel 2 arrangements reinforce either end of the business cycle, and we want those arrangements to be reformed to make the availability of finance much more stable. We are pleased that the hon. Member for Twickenham (Dr. Cable) agrees with us in that policy. It is important.
At home, we must give the Bank of England greater power to monitor the debt level in the economy, and to ensure that the Financial Services Authority takes action to tackle excessive lending. Although debt makes an important contribution to business growth, too much debt in the economy creates a bubble that hurts families and businesses when it bursts. We need to get it right. The Governor of the Bank of England has previously talked about a goldilocks economynot too hot and not too cold. I suspect that in recent years, we have had an economy that is too hot and we are now paying the price for that.
I shall turn to the package that the Government announced to refinance three of Britains leading banks: Royal Bank of Scotland, Halifax Bank of Scotland and Lloyds TSB. On 13 October, the Chancellor said that the
availability of lending to home owners and small business will be maintained at at least 2007 levels.[Official Report, 13 October 2008; Vol. 480, c. 540.]
What we have given government is an assurance that we will make our products available in the SME markets...and mortgages, so we will have good availability and we will market just as hard as we did in 2007.
There is a gap between the banks and the Government. The Government seem to be suggesting that lending will be at 2007 levels and the banks are saying that they will market at 2007 levels and make sure that there is good availability. Businesses will want some clarity about what commitment banks have given to the Government in return for the public finance they have received.
I would also like the Minister to comment on the effect that the Governments package will have on the cost of capital to banks, because that will have an impact on the rates at which banks will lend to homeowners and businesses. The preference shares that the Government have proposed are priced at 12 per cent., compared with 5 per cent. in the US. An extra 7 per cent. will therefore be paid by way of dividends, which will force up the cost of capital. The guarantees are about 50 basis points above the average for a banks credit default swaps. That, again, could increase the cost of capital and will flow through to small businesses. Has the Minister looked at the impact that might have on the cost of borrowing for small businesses?
John Thurso: The hon. Gentleman raises an important point regarding the cost of capital. It surely must be right that the preference shares are reasonably costly because of the reason they are going. Does he agree that in that circumstance, if the banks get their act together and behave properly, they ought to be able to repay those preference shares? They should not be made to hold on to them for five years, as I believe they are meant to do.
The hon. Gentleman makes a good point. I can see why it is a good idea to pay the preference shares back quicker, but we ought to think about the cost of paying them back quicker, because doing so would imply that there will be less money available for lending to small businesses and families. The Chancellor is proud that Northern Rock has repaid £11 billion back to the taxpayer, but, of course, that means there is
£11 billion less by way of mortgage capital out there in the market. We need to be careful about what we are going to commit the banks to and what the impact of accelerating repayment of the preference shares will be on lending. However, he makes a good point about reducing the cost of capital by repaying them earlier.
it will take time before the recapitalisation leads to a resumption of normal levels of lending by the banking system to the real economy.
That is the position we are in at the moment. It will take some time for those levels to return and it will therefore be harder for small businesses to access finance. That is why it is important to ensure that the right measures are in place to help small businesses with their cash flow. The Governors words are also a reminder that we need to look for a stable level of borrowing in the economy, so that we have economic stability and avoid some of the overheating we have seen recently.
The Exchequer Secretary to the Treasury (Angela Eagle): It is a great pleasure to respond to this extremely timely debate. I congratulate the hon. Member for Solihull (Lorely Burt) on her timing and on her success in the ballot. Her observations have given us some things to think about, and she gave prescient examples of what has been going on in her constituency. My right hon. Friend the Member for Makerfield (Mr. McCartney) also did that in his contribution. Those consequences have been brought home to many right hon. and hon. Members from all parties, which is why this subject has taken centre stage this week. We are all being made aware of how behaviour has changed and the effect that that is having on our small business sector.
Obviously, support for small business is a crucial subject at the best of times, but it is even more important during what we recognise to be much more challenging times. Like the hon. Lady, I recognise the vital role that small and medium-sized enterprises play in our economy. There are 4.7 million small businesses, which provide 13.5 million jobs. That is, I think, an increase of nearly 1 million in number since 1997 and 1.5 million more jobs since 1997. Those businesses contribute as much as large businesses to UK output and turnover.
Obviously, this tough economic climate creates challenges for us all. The effects of the global economic crisis have filtered down from major financial institutions to families across the country and to the countrys 4.7 million small and medium-sized enterprises, as we have heard. I recognise that some of the commercial sectors worst affected by the financial crisis are those dominated by small and medium-sized enterprisesfor example, the construction industry. Some 60 per cent. of employment in that sector is in micro-businesses, which is double the national average.
I am proud of the Governments track record in supporting small and medium-sized enterprises and we are determined to help businesses affected by the global economic difficulties by doing what we can to support those who need it most. Although the origins of the crisis are global, the response has included firm action in the UK that has, obviously, been taken by my right hon. Friend the Prime Minister and the Chancellor. Action has also involved working to restore stability,
which has included working with our counterparts around the world to achieve the same end. As hon. Members will know, one part of the Governments recent initiatives to support the UK financial system will use public money to buy shares in UK banks to improve their capital positionsthe recapitalisation programme. So far, HBOS, Lloyds TSB and the Royal Bank of Scotland have signed up to a combined Government investment of £37 billion.
As has been said, banks participating in that scheme have made an explicit commitment as part of their agreement with the Government that, during the next three years, they will maintain the availability and active marketing of competitively priced lending to small businesses at 2007 levels.
Angela Eagle: I was about to go on to that. The commitment means that lenders will offer a wide range of products at competitive rates, which are made available to credit-worthy customers. The decision to lend to individual customers and businesses must by definition remain a decision for individual banks. That is dependent on the specific circumstances and a level of detail that it is impossible for the Government to get into in terms of deciding whether individual A or business B should get a loan, as I am sure all hon. Members will understand only too readily. In addition, participating banks have committed to publishing an annual report on their lending to small business. That will ensure that there is transparency about how banks are supporting small and medium-sized enterprises.
The banks have also committed themselves to reporting on application and usage of the European Investment Banks small and medium-sized enterprise loan facility, which the hon. Lady mentioned. Those are credit lines offered to banks specifically for their small and medium-sized enterprise lending at competitive rates. The European Investment Bank has made €30 billion available under that facility over the period 2008-11.
The Government are taking steps to raise awareness of that facility and strongly encourage all UK banks to make the best use of the funding. We expect that participating banks will need to review comprehensively their business strategies, to take account of the recapitalisations and commitments that they have made. We look forward to the outcomes of that work.
Lorely Burt: Can the Minister give an indication of how long all the consideration that she describes will take? If I were a small business, how soon could I apply for some of the funding and how would I go about that? We have heard a lot about the funding, and many companies need it now, so will she elaborate on the time scale and methodology?
Angela Eagle: The scheme is applied for through banks. It is important that banks realise that the liquiditythe money from the European Investment Bankis available and that they consider how they can ensure that they have access to it, use it and pass it on.