That policy incoherence is reflected in still other parts of the Project Merlin deal. The government is eager for the banks to shore up their capital base so that another financial downturn does not become a meltdown. It is also eager to show that it is tough on the banks. So it increased the bank levy this year to £2.5 billion in a display of capital-draining toughness. It is also eager for the banks to abandon risky lending, but wants banks to lend more than they ordinarily would to business, especially small businesses.
So, in the hope of ending bank-bashing, the banks overlooked these contradictions and agreed to lend an additional £190 billion to all businesses, including £76 billion to small businesses which have found it difficult to get funding since the financial crisis brought wildly risky lending to an end. How such mandated lending to businesses the banks do not deem attractive risks is consistent with prudent banking remains unexplained.
In the event that direct taxes on the banks are not contribution enough to the Treasury's coffers, they were required to pledge £200 million of capital to the Prime Minister's Big Society Bank, to be used to finance community projects, mainly outside London and the South East. Clearly, the government recognises that small and medium-size businesses (SMEs in bureaucratese) are important job creators. So one goal of government policy is to encourage their establishment and growth. Never mind that
- higher tax rates act as a disincentive to risk-taking
- increased VAT drains purchasing power that might have been directed to small businesses
- the Treasury's promise to send a horde of tax collectors to teach SMEs how to organise their data might not add to the lure of entrepreneurship
- entrepreneurs are at risk of ex post seizure of their profits by a Treasury that refuses to draw a sharp and visible line between illegal tax evasion and perfectly legal taxavoidance
Those are the sorts of things that try the souls of the very entrepreneurs the government wants to see set up and prosper. They are also easy to fix. Another indicator of incoherence is the manner in which enterprise zones are being created. The selection process is so laden with difficulties, the selectors so unfamiliar with the needs of small businesses, that many potential entrepreneurs will find the game not worth the candle.
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