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OPINION

Targeting the UK mittelstand

Targeting the UK mittelstand
June 17, 2020
Targeting the UK mittelstand

They might settle on Deuteronomy 15:1-2, which centres on debt remission. “At the end of every seven years thou shalt make a release…every creditor that lendeth ought unto his neighbour shall release it; he shall not exact it of his neighbour, or of his brother; because it is called the Lord's release.

Verily! The idea of a debt jubilee has obvious attractions, but there is scant evidence that this biblical injunction was ever put into practice in antiquity, and even if it was implemented in 21st Century Britain, the chances are it would not erase your Mastercard obligations. Long gone are the days when moneylenders moderated the terms of their credit in response to advice from theologians on how to apply biblical teachings. The sacred has given way to the profane, with modern financial systems enmeshed with the practice of usury.

The possibility exists, however, that we may witness a widespread reassignment of sovereign debt, perhaps even extending beyond low- and middle-income economies. This idea, once derided as inimical to the aims of monetarist policymakers, now attracts mainstream support.

The G20 has already agreed to provide temporary relief to some countries, while backing a scheme to establish emergency liquidity lines for developing nations struggling in the face of the pandemic. Unfortunately, private bond holders have been rather less forthcoming.

As an advanced economy the UK may have to employ slightly more creative solutions to galvanise the economy in the aftermath of Covid-19, particularly as the shape of our future trading arrangements in Europe has yet to be finalised.

To this end, a new report, Unlocking Britain, published by think-tank the Social Market Foundation, recommends that HM Treasury should pump £15bn directly into small- and medium-sized private companies in the UK in exchange for shares that would one day be sold to the public. The heavily discounted shares would initially be made available to NHS workers and people aged 18 to 30, specifically targeted at those who earn less than £30,000 a year.

The investments (funded by gilt issuance) would be made via the government’s British Business Bank, leading to the formation of a 'Recovery Fund', which would float on the Stock Exchange eventually. The fund would hold stakes in the companies it backs, although allocations would be controlled by Financial Conduct Authority (FCA)-regulated fund managers with the aim of achieving “broad geographic and sectoral coverage”, in exchange for a “capped, reasonable”, though unspecified, cost to the Exchequer.

The report's author, Bim Afolami, the Conservative MP for Hitchin and Harpenden, has previously served on the Public Accounts Select Committee, and is currently parliamentary private secretary to the Work and Pensions Secretary. The proposals within the report came about through consultations with business figures, entrepreneurs, and economists, so it is refreshingly devoid of ideological precepts, even though it is understandably a bit thin on detail. It is unclear how net profits would be distributed, never mind the fact that private companies tend to reinvest a higher proportion of their capital, while others favour tax-efficient ways of extracting profits from their businesses.

The report also contains legislative proposals which would allow up to 20 per cent of an Isa pot to be invested in UK private companies, subject to certain conditions, including a compulsion for investors to seek prior advice from an FCA regulated financial adviser.

Mr Afolami is keen on the idea that the Bank of England should set a nominal GDP target, which would enable monetary policy to act as an automatic stabiliser in response to cyclical turns of the economy, thereby providing greater flexibility than the existing narrow focus on inflation rates. In addition, he thinks the UK should increase the proportion of index-linked debt, as its real cost is unchanged regardless of the direction of inflation (or prospective deflation), a key consideration as things stand.

This Social Market Foundation report also emphasises the need to close the skills gap in the economy, aided by increased cooperation between public and state schools, while problems linked to excessive borrowings, and supply chain vulnerability are also highlighted.

All worthy stuff, but you imagine that even though the establishment of a Recovery Fund would give investors greater access to fast-growing, yet largely inaccessible, areas of the economy (‘fintech’ springs to mind), the Neil Woodford saga demonstrates the risks associated with investments in unlisted companies.