When Ken Clarke was Chancellor he was lucky. He took over after all the difficult decisions had been put in place by Norman Lamont to get the then deficit under control. Reducing the deficit was a necessary but not sufficient condition for recovery. He took over when world trade and the world economy were going well, and the British banks were able to lend. As a result the economy grew well and the deficit shrank.
George Osborne has to do the same on a bigger scale. He needs to make his own luck. He has done the difficult thing, setting out a new path to cut the deficit. He now needs to make it more lilely the private sector will grow as fast as is needed to do the rest. World trade and the western economies cnanot be relied on to grow as quickly as we would like given the state of Euroland and the wobbles in the US. Meanwhile the UK banking system is not delivering the cash and credit to UK industry and comnmerce that it needs to be more confident and to put in more capacity.
The government needs to make changes to the banking industry to ensure more competitive credit is available to finance recovery. It will not wish to pre-empt the important Vickers review of retail and investment banking, by expressing a view on whether the two should be split. It could conclude now that the UK retail banking market is not competitive enough and start to do something about it. We need the banks to deliver more now, not in two years time.
I have two suggestions. The first is to hold a competition for new banking licences for suitable companies and consortia to aply for, to give a push to the rumours that there are people and businesses wanting to set up as banks. They can apply anytime anyway, but it would show the government is keen and will listen with their Regulators to the needs of the wannabes to get something going.
The second is to package up two, three or four UK retail banks from within the RBS and Lloyds/HBOS empires for sale. These conglomerate banks hold many brands and franchises, ranging from Nat West and Halifax to Lombard, Cheltenham and Gloucester and Birmingham Midshires. Some of these have been fully integrated, others still have some independent identity wthin the global banks. It would be possible to make up a package of branches, assets and liabilities in each case, sell them on to the market with a new quote, and raise new capital to give them growing room at the same time.
The UK needs say five new banks with starting capital of say £5 billion each, allowing them to establish a combined balance sheeet of say a conservative £200 billion. That would allow a useful injection of new cash into suitable UK business projects. We have a more competitive pound, lots of empty buildings and plenty of unemployed labour. We need the cash to get it back to work.