More economic trouble is coming. And there's only one escape route

The Herald Scotland

6 days ago

Unfortunately, although politicians say they like economic growth they generally have no idea how to nurture it and often act in ways which seem designed to slow the economy down. The UK Government's latest Employment Rights Bill is a perfect example.
There are many things which encourage faster growth: a stable and not stifling regulatory regime, opportunity, social attitudes to wealth creation. In general the direction of travel for these factors is unhelpful but there is another obvious key factor - arguably more powerful than all the rest - which is curiously overlooked. That is the availability of money.
For an entrepreneur to turn a great idea into a fledging business takes money and to grow that business into a company which creates jobs and wealth takes more money still.
If we look back to the last period of really strong growth in the UK economy, the mid-1980s to about 2007, a lot of favourable factors were at play but the one which mattered most was that money was available in a way which it isn't today.
During that time of strong growth Scotland was extraordinarily lucky to have the Bank of Scotland as its key economic facilitator. RBS may have been bigger but it never fostered growth in the same way as the Bank of Scotland did.
A business person needing money for growth could go to see their local bank manager, who actually existed and whose job was to grow the bank's business from their branch. If the amount needed was bigger, you went up to the Head Office on the Mound to see somebody, probably called Gavin, Peter or Colin, who took time to understand your business and provided funding to support its growth. There would have been no Stagecoach or Sports Division able to grow rapidly whilst the founders retained control without Bank of Scotland providing finance based not on lending against assets but against the expected cashflows of the business.
No public subsidy was involved, no stupid questionnaires to make sure woke targets were being met, just sensible people making commercial decisions which enabled hundreds of companies to get off the ground and grow.
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The financial crisis of 2008 put paid to all that funding for growth and it has never been replaced. What sank RBS and HBOS was not supporting entrepreneurs but the same good old mistake behind almost all banking crises: too much lending against overvalued property. The price of the state bailout though was the dismantling of a support system which had served us well.
The UK and Scottish Governments have tried to put in place schemes which provide sources of investment. The SEIS and EIS schemes where investors receive tax relief when investing in young companies is effective, the various government-backed banks including the Scottish National Investment Bank, rather less so.
These new schemes provide equity finance whereas most entrepreneurs want debt; they don't want to give up too much control of their companies. Where debt finance is available for companies it now nearly always requires a personal guarantee from the directors of the borrower which acts as a deterrent and negates the whole point of having a limited liability company.
What is needed to increase significantly the supply of money to fund growth is to switch the banking system back on as a major provider of risk funding. This won't happen on its own, the UK Government has to give it a shove.
The former Bank of Scotland HQ on The Mound (Image: Newsquest)
Each of our banks should be given targets for entrepreneurial lending and their progress monitored and reported on regularly.
Entrepreneurial lending needs to be defined but its definition should be broad: lending to a company of up to £10million, the company must be a trading company and not own property or land. No personal guarantees allowed. Keep it simple. What the bank should get in return for this lending is that the interest and fees they earn are not subject to corporation tax.
One or more banks will see the opportunity to get tax-free revenue by extending loans which are risker in order to help businesses grow. The regulator's instinct to do everything possible to stop such lending must be curbed. Mistakes must be allowed to be made.
Not a spectacular initiative for a politician to announce, no ribbons for them to cut but if something like this was introduced it really would help growth.