Budget 2010 - Treasury Contents

Examination of Witnesses (Question Numbers 260-276)


30 MARCH 2010

  Q260  Nick Ainger: But, if you look at the figures on page 42, the gross figures which you are going to use again, there is only a small increase for the Lloyds Group from £38 billion to £44 billion and for RBS from £41 billion to £50 billion, but in fact the net lending for RBS last year actually fell by £6.2 billion. Are we going to see genuinely a significant increase in the availability of credit to business by using these targets? How were the targets actually arrived at?

  Mr Darling: Let me go back to last year, first of all. Those targets, if you recall, were agreed over the weekend and the days ensuing the recapitalisation, so what we were doing was putting in place something very quickly, we had never done this thing before, net lending was something that we could measure and we thought it was the right thing to do. Let me tell you what happened last year, if you look at RBS. RBS lent out, its gross business lending, £41 billion. The repayments were £59 billion. Now, with the best will in the world, a bank can hardly say to someone, "Sorry, I don't want you to repay your loan", and indeed in RBS's case I would be very distressed if it did say that. Now, that gives you your net lending of minus 6.2. For Lloyds, it was 38 gross and they had 33 repaid, so it was a slightly better position, but overall, as you rightly say, the net figure was negative. Now, this year the RBS figure for gross lending is 50, Lloyds 44, total 94 billion and then, on top of that, there is additional residential lending. What we did was to try and reach an estimate of what, we thought, the banks could lend, given their general positions, and, what we thought, the SMEs' requirement might be and that is how we reached those figures, but the gross figures, I think, are a better measure of what is going into the economy, if you like, although obviously you do need to keep your eye on what is happening next because that represents the stock of what is out there.

  Q261  Nick Ainger: But it is the net lending that we are interested in.

  Mr Ramsden: Can I just amplify what the Chancellor is saying because I think in last year's economic conditions, we saw a very large fall in business investment reflecting the kind of global collapse in confidence, so if you could postpone an investment decision and, if you chose to, to repay some borrowing, then many businesses did that. What we are seeing in the future is that we expect that business investment will start to recover, so you should see fewer of the kinds of repayments that we saw last year. As confidence returns, there is less uncertainty and you are going to be thinking, "Do I repay my debt or do I invest in terms of future capacity?" so that is how we imagine the context will change as well, which is the backdrop to these commitments.

  Q262  Nick Ainger: But the incentive to invest is limited in the main to the annual investment allowance, which I appreciate is a great benefit to a small business, but for large businesses, who are looking to invest tens or hundreds of millions in certain instances, it is not a great incentive because the maximum allowance is only £100,000.

  Mr Darling: That allowance is essentially aimed at the medium and smaller-sized firms. If you are dealing with a large multinational, the £100,000 is not going to make much difference here or there. Last year, we raised the annual investment allowance for larger firms, and that was a one-off thing,[1] and of course firms can offset investment decisions against the tax they ultimately pay. Coming back to the bank lending, larger firms, generally speaking, last year found it easier to raise money on the bond market, for example. I think the economic priority, therefore, in the Budget was the smaller and medium-sized firms, which is why I doubled the annual allowance which directly affects them. Coming back to your bank lending point, there is a number of things I would say. Firstly, there are, inevitably, in a recession a number of things in play. Some people are paying back their loans because they think, "Well, I can repay it, so why should I be exposed to the bank when I don't need to?" As Dave Ramsden was saying, equally, one of the things that we have had to wrestle with in the last year is that you get firms saying, "Well, I'm not sure whether I will invest this year because there is a lot of uncertainty about". What you want to be sure of though, as we come through into recovery, is that firms say, "Well, actually I'm going to take on someone or I'm going to buy a new piece of plant or machinery", and this is something for which they need to go to the bank, and will the money be there? I think all of us have to deal in our constituency experience with cases where firms will come to you and say, "Look, the bank's being really difficult and I can't get lending", and, when you look into these things, sometimes they are absolutely right, and I can think of a number of cases in my own constituency where I have been able to persuade the banks to take a different view and there are other cases when you discover something about the firm which was not immediately apparent and you say, "Well, I can see why it might be more difficult". That is why we set up this independent mediation service to try and break through some of that.

  Q263 Nick Ainger: I will come on to that, but, coming back to the banks, obviously a significant proportion of those repayments were not volunteered necessarily by the businesses involved, they were actually demanded by the banks because they were trying to reduce their exposure and so on, so it was not just a voluntary situation. Let us move on. What sanctions have you got if RBS and the Lloyds Group do not meet these targets?

  Mr Darling: We have binding agreements with the banks to ensure that the gross lending targets are met, and I have every reason to believe they will be met. They are stretching, but I think they can be delivered. What I want to do though is to introduce an independent service, an adjudication service, so that all the problems that come up where people say, "I've got this firm" or—

  Q264  Nick Ainger: We will move on to the adjudication service, but I just want to know, if RBS and the Lloyds Group do not meet the targets that you have set them for gross lending, and we do not know what the net lending is going to be, what sanctions are there?

  Mr Darling: One of the sanctions is on the remuneration of boards. As you will see, it is set out in the Red Book, one of the things that we can do to concentrate—

  Q265  Nick Ainger: That is one of the things, you can ask the Remuneration Committee?

  Mr Darling: To take that into account, yes.

  Q266  Nick Ainger: What if they do not?

  Mr Darling: They are required to take that into account so that, if the bank does not actually meet its targets, then they have to do something.

  Q267  Nick Ainger: I suppose they could take £1,000 off somebody's bonus?

  Mr Darling: One would hope that—well, bonuses are being deferred anyway. I think there is no reason to believe that they would not take the instruction issued to them seriously and not just regard it as some sort of token thing. I really am very, very focused on the fact that bank lending is pretty critical to this sector and it is important actually, if it became clear that these targets were adrift, it is something that we would want to be dealing with through the year and not wait until the end of the year and discover that it had all gone wrong. At the moment, the Department for Business and Innovation gets monthly figures, so it knows exactly what is going on and meets the banks on a very, very regular basis. Remember, it is not just the ones that we have got shareholdings in, but it is other banks as well.

  Q268  Nick Ainger: Let us move on to the small business credit adjudicator. Obviously, any small business that feels that it has been treated unfairly by a bank wants pretty rapid action because often they are facing possible foreclosure or whatever. What guarantees can you give that the adjudication service will respond quickly?

  Mr Darling: I hope that it will do. It has to be legislated for because they need power to get access to bank information and we want to make sure that it is properly resourced to do it. They have a system like this in France and they have had it for about a year now. It does not mean obviously that, if you definitely go to the adjudicator, you will get your loan, but it means that somebody independent will be able to form a view as to whether or not you have been treated reasonably.

  Q269  Nick Ainger: What happens though, and it is already happening in certain sectors, where banks either are very reluctant to lend, as certainly in the past, perhaps to the construction industry, for sensible reasons, or they are factoring into the interest rate that they are charging on the loan or the charges on the loan the element of risk? If a building company, which is completely viable, finds its bank does not want to lend it anything or is charging it what, it feels, is an extortionate interest rate, what would happen with the adjudicator in the circumstances like that?

  Mr Darling: The adjudicator has to take into account, or will have to take into account, all relevant matters. Take your construction company. I met someone recently in the north-west of England who had built a very high tower block full of luxury flats which, as far as I could see, were on the market for £200,000 going up to £700,000, depending on the view that you wanted. He was complaining that his bank was not prepared to bankroll him for a second block of flats, and it did occur to me that the bank perhaps was not being entirely unreasonable as he had not yet let the first block. Now, I give that as an example where it just struck me, and I think the guy actually conceded, that the bank might have had a point. There will be occasions when a bank will say, "Look, you might have sold those flats five years ago at that sort of price, but you're never going to do it now and, therefore, if I'm going to lend you money, I'm not lending it to you at the rate", or, if you are HBOS, they might have come to the conclusion of, "Rather than charge you precious little, we will actually have to charge you what is now an economic rate", HBOS having lost a fortune on very conventional lending.

  Q270  Nick Ainger: But, Chancellor, you told us earlier, I think, in response to Mr Mann, about the need in this country for us to build more houses. The construction industry is very important, but a fear of many small businesses involved in the construction industry is that the banks will not lend to them.

  Mr Darling: I entirely take your point about the construction industry, and equally I agree with you that there are occasions when banks have acted unreasonably. What we cannot do, as the Government, though is to say, "As a matter of course, you must lend in a particular sector, no matter how you evaluate that risk". If you do that, you will get into precisely the problem that HBOS spectacularly, Northern Rock and the housing market got themselves into where they were making loans on terms and conditions that made no sense whatsoever and resulted in bringing down those institutions.

  Q271  Nick Ainger: The final point on that though is that there is a real problem. We want to see the construction industry, particularly home-building, expanding, yet we have this problem of banks being reluctant to lend in that sector. How do you address that?

  Mr Darling: We do have that problem, and I think there is a number of things you can do both in relation to support for the housing sector, the public sector, in bringing forward the spending and so on and also the general conduct of the economy to try and bring about conditions where demand increases, but I cannot say to the banks, "You must lend this gross amount". What, I think, is more difficult, subject to the point I make about the adjudication service where people can say, "You are acting reasonably" or unreasonably, is that there will be propositions which come up where the Government cannot really form a view as to whether that was a good prospect or whether it was not a good prospect, and I do not see a way of getting round that.

  Mr Ramsden: We have to consult on how this adjudication service is going to work, but it is likely that, once it is on a statutory basis, it will have the power to penalise banks where it finds that businesses have been treated unfairly, and that can include fines.

  Mr Darling: But it does not get away from the fact that commercial decisions have to be made, and that is always going to be difficult. Your idea of a good loan and my idea of a good loan or whatever, they may be different and that is something where I really do not want to raise people's expectations that somehow there will be a problem in the future, whatever your prospects are.

  Q272  Mr Brady: Chancellor, this year the UK contribution to the EU budget will be £4.5 billion higher than it was two years ago. How do you justify that to the British taxpayer?

  Mr Darling: I think it was part of an agreement that we reached about three years ago in relation to the funding of Europe generally. I suppose the answer to your question is that one of the underlying principles of the European Union is that we do help the developing countries grow because in time we will get the benefit of that contribution. There are other areas though of our contribution to the European Union, particularly the Common Agricultural Policy, for example, where the position of successive British governments, ours included, is that we believe that it needs further and substantial reform. However, there are many countries in Europe who, for reasons that we know, take a different view, but essentially we are part of the European Union and we do pay a contribution into it, but we get a lot back, not least because it is by far our biggest trading partner.

  Q273  Mr Brady: How much of that extra £4.5 billion is as a result of giving up part of the British rebate?

  Mr Darling: Well, we have maintained the position so far as that is concerned. If you want a breakdown of that, I will have to write to you.[2]

  Q274 Mr Brady: I would like to know exactly how much is attributable to that decision.

  Mr Darling: I will happily give you a breakdown of where our contributions go.

  Q275  Chair: Chancellor, can I thank you very much for your evidence to us this morning. This will be the last appearance of yourself and your officials, so can I thank the Department and the officials, who have always been very helpful and serious in their responsibility to the Committee over the years, and yourself because you have always been willing to come at any time to the Committee, and we are grateful for that. I think the Committee would all agree with me that, in a personal sense, we wish you well over the coming weeks, months and years.

  Mr Darling: I did not know I had a choice as to whether I came here or not!

  Q276  Chair: Well, we are telling you now.

  Mr Darling: Now you tell me at this stage of the Parliament! Can I reciprocate, in particular, by not only acknowledging the work of the Treasury Select Committee, which has built up a pretty formidable reputation over the course of this Parliament, but to acknowledge what Mr Fallon does as your deputy, but particularly you, and acknowledge the work that you have done over the last four or five years; I think you have chaired this Committee in an exemplary manner. We have all gone through some difficult times, but I think the way in which the Committee has conducted itself has been in the best possible way, and I think that many people, particularly those outside Parliament, will see that, despite everything that has happened, there is a lot in this Parliament that is working very, very well and we can be proud of.

  Chair: Thank you very much, Chancellor.

1   Note by witness: For clarification: the Government doubled the main rate of first year capital allowances to 40%, which was of most benefit to larger firms investing over the threshold of the annual investment allowance. Back

2   Ev 43 Back

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