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Govt business bank would cost £40bn, says think tank

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The Government would need to borrow an extra £40bn to fund the initial costs of setting up a state-backed business bank, according to the Institute for Public Policy Research.

Earlier this month, business secretary Vince Cable pledged to set up a state-backed lender to boost lending for SMEs. Chancellor George Osborne has also backed the plans, which have the support of the Confederation of British Industry.

In its report, Why We Need a British Investment Bank, the thinktank says the £40bn could be raised from a variety of sources such as targeted quantitative easing, a one-off levy on commercial banks, selling Government stakes in the Royal Bank of Scotland and Lloyds Banking Group, national savings or Government spending. However, it believes central Government spending is the most effective method.

The report states: “If the bank is to be capitalised from general Government spending, the Government would have to borrow more. This would, in any case, seem a more appropriate way than spending cuts and tax increases of financing a one-off spending item.”

The report argues a British investment bank should be allowed to raise funds on capital markets by issuing bonds and creating a balance sheet of £140bn over four years.

The IPPR estimates that a maximum annual Government investment of £10bn, equivalent to 0.7 per cent of gross domestic product, would allow the bank, using a 2.5 leverage ratio, to lend up to 2 per cent of GDP a year, having a “material impact” on the economy.

A Department for Business, Innovation and Skills spokesman says: “Discussions on how a business bank would work are ongoing and the details on scale and scope are currently being worked on. The business secretary and the chancellor will set out details later this autumn.”

Jacksons Financial Services managing director Pete Matthew says: “There is a lot of pressure on banks to rebuild balance sheets and lend so the Government should spend whatever it costs to set up its own bank. Everything costs money, it is how you spend it that matters.”


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