Funding for Lending Scheme to be Extended?

Funding for LendingThe Chancellor faces increasing pressure that his austerity measures may be affecting small businesses and George Osborne is said to be looking at further boosting the Funding for Lending Scheme.

The Government’s Funding for Lending Scheme (FLS), which launched in July of 2012, was intend to be an incentive for banks and building societies to increase lending.

By lending to banks and building societies at extremely low rates, the government expected the financial institutions to lend more to homebuyers and businesses.

The £80 billion scheme was due to end in January 2014 but, with the failure of the scheme to increase lending to businesses to the level that was expected, the Government has had to rethink its flagship FLS.

Additionally, the International Monetary Fund (IMF) has questioned whether Mr Osborne’s austerity measures are working and has cut its growth forecasts for the UK, slashing its own figures for the country from 1% to 0.7% this year and from 1.9% to 1.5% in 2014.

Lack of Credit

In a report the IMF said the UK economic recovery was progressing, albeit slowly, and that private sector growth was being held back by economic uncertainty and a lack of business credit.

Furthermore, the report expressed concern that export-led recovery was being hampered by a decline in productivity growth and high unit labour costs.

The IMF said the road to recovery "remained bumpy" for Britain, adding:

“In the United Kingdom, other forms of monetary easing could be considered, including the purchase of private sector assets and greater transparency on the likely future monetary stance.”

“Greater near-term flexibility in the path of fiscal adjustment should be considered in the light of lacklustre private demand.”

Olivier Blanchard, the IMF’s chief economist, warned that the UK was "playing with fire" whilst IMF Managing Director, Christine Lagarde, warned that maybe now was the time for Mr Osborne to reconsider the pace of his austerity drive.

FLS Needs Adjusting

In February Moody’s downgraded the UK’s sovereign debt rating from AAA to Aa1, the first time the credit ratings agency have done so since 1978.

With the news on Friday that credit ratings agency Fitch had downgraded the UK’s coveted AAA rating to AA+ the Chancellor finds himself under increasing pressure to stimulate the economy.

Standard & Poor’s are the only agency to keep the UK on AAA standing.

Vince Cable recently stated that FLS "needs adjusting", so now could be the time for George Osborne to extend the lending scheme and add extra stimuli for small businesses.

The Chancellor has until next month to make the announcements when an IMF delegation arrive in the UK to discuss Britain’s economic options.

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