Accounting rules must not impede business bank's creation

by Richard Crump

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21 Sep 2012

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Vince Cable

THE VAGARIES of UK accounting should not deter the government from creating a state-backed investment bank, despite the likelihood that it would cause the chancellor to miss his fiscal targets, a think tank has said.

The government's plan for a British investment Bank (BIB), announced by business secretary Vince Cable last week, will require £40bn of public funding and will also need to tap bond markets for up to £100bn if it is to successfully boost lending, the Institute for Public Policy Research (IPPR) has said in a report.

The IPPR also suggested that the chancellor change accounting rules to keep loans off the country's balance sheet, or risk missing his fiscal targets.

As the bank will be part of the public sector, its financial liabilities – the money it raises in capital markets through bond issuance – would be counted towards public sector net debt but the bulk of its assets would not be netted off. Only liquid assets are taken into account in the calculation of net debt.

The creation of a BIB would lead to a substantial increase in public sector net debt as currently measured, the IPPR said.

"Such a bank would require an initial injection of government capital which – on the existing accounting rules – would make it even less likely that the chancellor would meet his fiscal targets," Tony Dolphin, IPPR chief economist, said.

According to the IPPR, the self-financing activities of the state-backed bank should be excluded from the calculation of public sector debt and borrowing, on the same grounds that temporary financial interventions are now excluded. Another would be to switch the focus of fiscal policy away from public sector measures in favour of general government measures.

"A fully-fledged British investment bank should not be held back by the vagaries of the UK's accounting practices. Its self-financing activities should be excluded from the government's target fiscal measures and it should be free to raise funds on capital markets," said Dolphin.

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