Getting finance flowing important for all recovery plans

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Vince Cable's commented in the Sunday Times on 7 August that it's the government's top priority to get lending going again.

It's another timely reminder as we're about to have the Bank of England's release of the 2011q2 results for the Merlin lending agreement out on Friday. As I've said before, Merlin is a positive sign but far from the solution to improving the flow of finance to SMEs in the UK.

But Cable's focus on lending was mercilessly slammed in a blog by the IPPR's senior economist, Tony Dolphin, the next day. Dolphin's comments are indicative of the very sharp debate that continues to rage about how best to respond to our current economic difficulties.

Broadly, speaking the coalition's position has been to prioritise getting the fiscal accounts in order, necessarily reducing government spending and increasing some taxes.

Ministers love to point to bailout basketcases in Europe as an example of there but for the grace of deficit reduction goes Britain.

Convincing markets the government is in control of its accounts is critical to keeping the cost of finance low for the overall economy and avoiding sovereignty-stripping plans being forced on us by the IMF.

The argument is that we were dangerously close to an unsustainable tipping point.

Alternatively, some economists argue that this prescription is wrong for an economy that is still too weak for government spending to be withdrawn.

In fact some argue that perhaps even more government spending is needed to compensate for the shattered confidence of consumers and investors who've cut their spending in response to ongoing turmoil.

But whichever argument you subscribe to I would've thought it's almost unquestionable that better access to finance is an important part of any recovery plan.

We need to be doing everything we can to boost investment and exports – a sustainable future basis for growth.

There's a lot that's deterring investment right now. We have a great chart showing the divergence between investment intentions (as measured by our own survey) and actual investment (ONS). It's a divergence that's emerged since the financial crisis and crucially appears for small and medium sized firms only - not larger firms, who have the most options for accessing external finance. The example below is for small firms:

Many factors will be impacting on this – such as the eurozone crisis, growth concerns in the U.S., or inflation concerns in China. These are all creating uncertainty that is deterring investment.

Those factors are largely outside the scope of the UK to influence. But improving our access to finance landscape is able to be influenced.

Lending to SMEs from our banks is right at the heart of that because they have few options for external finance outside banks.

So wherever you fall in the wider macro debate, I think boosting access to finance has to be part of the policy response and Cable was right to highlight this.

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