An open letter to Baroness Shriti Vadera

Dear Shriti,

Congratulations on your appointment earlier this month as Parliamentary Under-Secretary of State for Competitiveness and Small Business.  You take up the post at a crucial time.

Small businesses around the country are already being hit hard by the credit crunch and will be hit harder still in the near future as its consequences rip through the economy with dire consequences for employment, future tax revenues etc.  The whole country – and not just small business – needs you to be an effective and powerful voice at the heart of government for good sense and good finance.

As a former banker you will know that all business – large or small – depends on inputs of capital, labour and materials in varying proportions.  The credit crunch bears very directly on one of these – the cost of capital.  As you will also know, there is very rarely an absolute shortage of anything; more typically there is a shortage at an affordable price and that is why the question of price matters so much – and not just availability which is how the press mostly reports it.

In a posting I made yesterday I calculated (albeit in an approximate back-of-an-envelope sort of way) that the bailout plan would result in retail interest rates of around 16%.   Just a few hours later I settled down to watch the Channel 4 News only to see them carry an item about small businesses being trashed by – you guessed it – interest rates of 16%.   A small business owner rightly commented that this is, “almost a credit card rate”.  

To put this in context, I was able to get a loan at 7% to finance the purchase of a small business some years ago from the retiring owner.   At 16% it would not have happened and several people would now be unemployed.  It is no exaggeration to say that if the rate remains at anything like 16% businesses around the country will be decimated.  For this to happen at a time when sales revenues are down anyway will be a double whammy.  (Come to think of it double whammies are bit of a Labour speciality).

Moreover, many are now calling for interest rates to be slashed ASAP to stimulate the economy and there is little doubt that a cut, perhaps as much as 2% will be made soon.  However, Gordon Brown’s cunning bailout plan would prevent this feeding through to the real economy. 

In your Channel 4 interview yesterday you effectively conceded the point saying that, “as their [the banks] own cost of funding has increased a problem has emerged, that they are seeking to pass it on“.  Well, yes!   Go to the top of the class!  But, the banks cost of funding has increased because the government of which you are a part decided to increase it; this is the inevitable consequence of sticking the banks with a penal interest rate.  In the final analysis the banks will not pay this, business will and we will all be poorer for it.

It’s all very well for your boss to pose around like he’s some sort of economic genius, but it’s actually pretty obvious that he’s totally out of his depth (though to be fair, rather less so than Dave from PR). 

Unfortunately the civil service doesn’t help much either – as a body they have never had to engage fully with issues of cost or price (as opposed to temporary famines in departmental budgets which are quite different).  They need to learn that taxpayers are not a magic money tree.  In fact this also bears on the ‘competitiveness’ part of your brief; we need a government that understands that its role is, in part, to help individuals and businesses cut costs.  Not by subsidies obviously, but by doing things differently, better, more efficiently.

So we need a root and branch change, both in the leadership and the engine room.  In the meantime, please do what you can and explain to your boss that he should make some key changes to the bailout plan as it now stands.

Yours etc.

Liberal Eye


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