Struggling British businesses are set to receive a surprise boost from the government who have introduced a new scheme, which will see the state act as a bank and top-up bank loans. With banks still wary of lending money, especially to high risk sectors, the Brown government has decided to use tax-payers money to help out businesses which are struggling with liquidity.

The government is calling the scheme “match funding” but according to reports this may be a misnomer – the taxpayer may well end up paying 75% of each loan because according to government estimates the banks are only expected to put in 25%.

Credit guarantees all-the-rage

This is yet another attempt by Labour to encourage the banks to begin lending again by putting the responsibility of defaults on the government. Business leaders and the opposition have been pushing for a helping-hand for business for some weeks, with the head of the CBI earlier writing to Brown asking him to "do whatever is needed" to help.

"Any other government measure seeking to mitigate the recession - such as additional fiscal relaxation - would risk becoming an expensive failure in absence of further action to tackle the core problem of access to capital and credit. Where necessary, government itself should provide interim credit, capital and liquidity directly to offset the shortage in the private sector." Added Richard Lambert from the CBI.

The Conservatives are expected to see this announcement as a vindication for their own scheme, which Mr. Cameron announced at the end of November.

“(The Conservatives) proposed establishing a temporary new government body — the National Loan Guarantee Scheme — to underwrite lending from the banks to British businesses. It would do so for a commercial insurance fee, passed on by the banks, that would properly protect the taxpayer. Banks would be able to use the scheme’s guarantees to underwrite a significant proportion of any new loans to business.” Cameron said last month.

The Leader of the House Harriet Harman, speaking in the House of Commons said that the scheme would be in place by January.

"It's true to say that, while lending figures are starting to show increasing lending to small businesses, there are still businesses having problems." She added.

Bank of England mull rate cuts

A senior figure from the bank of England highlighted the fact that it was the uncertainty of banks was a major factor in trying to get the economy back on track. Charlie Bean, the Bank's Deputy Governor said that the lack of reserves were hurting the economy.

"It may well turn out that further capital injections are required. I certainly wouldn't rule that out. It may well be necessary if the banks feel they're going to feel comfortable about continuing to lend." He said.

Bean also noted that it may be necessary to follow both Japan and the US in cutting interest rates to zero as a way to pull Britain out of recession.