With no room to spend its way back to growth in next week's budget, Britain's government is straining to find creative ways to boost the economy and betting on new schemes aimed at helping the private sector spark recovery.

But chancellor George Osborne's much-vaunted plans to boost bank lending to small businesses and encourage pension funds to invest in Britain's creaking infrastructure look set to be tarred with disappointment before they are even launched.

Britain's recovery from the post financial-crisis slump has been choppy and it is likely to be some years before the level of economic output returns to what it was beforehand.

Billions of pounds in emergency funding have been pumped into the economy by the Bank of England's quantitative easing drive, but much of the cash remains stuck on the balance sheets of banks which have faced howls of protest in the media over their alleged reluctance to lend to small businesses.

This brings the government hope that private firms will fill the shortfall in demand and jobs left by the deepest public spending cuts in generations under even closer scrutiny.

Analysts say the main challenge facing policymakers is to get the economy onto a more sustainable footing by cutting its reliance on debt and consumption, and implementing supply-side reforms that over time will encourage companies to invest and create employment.

The credit easing and pension fund (plans) could be helpful at the margin, but I don't think they're powerful enough to be a game-changer, said Ross Walker, UK economist at RBS.

The wider economy is going to have to go through this adjustment process, which is not an easy sell if you're in the Treasury, but it's closer to reality.


The economy shrank at the end of last year, raising fears about a lurch back into recession, and prompting the Bank of England to restart its quantitative easing programme to support demand. Though recent surveys suggest conditions might be improving, unemployment remains at a 16-year high.

Osborne announced a raft of measures at the end of last year that he proclaimed would unlock investment and give the economy a much-needed tonic. But even his colleagues in the coalition government acknowledge it won't be easy.

The recovery is not going to be a conventional one, it is going to be a choppy one, and there isn't a magic wand solution to the painstaking work you need to do to create that recovery, Deputy Prime Minister Nick Clegg of the Liberal Democrat party told a business conference.

The National Loan Guarantee Scheme, trumpeted as a way to get much-needed cash flowing to small businesses to promote investment and job creation, has been criticised for not addressing the problem of banks' stringent lending criteria.

Meanwhile, pension funds will stump up only a fifth of the 20 billion pounds in infrastructure investment Osborne had been hoping for, because of a reluctance to take on the construction risk of projects, and uncertainty about returns.


The government is determined to stick to its plan to eliminate a budget deficit that was a record 11 percent of gross domestic product when it came to power in 2010, and warnings on Britain's triple-A rating by Moody's and Fitch will strengthen that resolve.

Banks have been reluctant to lend to small firms, while companies are wary of taking on debt because of the uncertain economic outlook. Business investment plunged by 5.6 percent at the end of 2011, shaving 0.5 percent off economic output.

Osborne hopes his credit easing scheme, which offers government guarantees on 20 billion pounds of bank loans, will help by cutting the cost of loans to small firms by up to 1 percentage point.

But business groups like the Federation of Small Businesses and the British Chambers of Commerce argue that banks' reluctance to lend is the main obstacle to firms obtaining loans, not the cost of borrowing.

It appears unlikely that the nature, or quantum, of credit easing will resolve this problem alone, although it will be welcome in the short-term, BCC director general John Longworth, said in a speech to the group's annual conference on Thursday.

The FSB this week accused banks of credit rationing after a survey of its members showed that 1 in 5 firms had applied for credit in the last three months, but 40 percent of loan applications were rejected.

Banks have argued all along that the cost of lending is not the main deterrent to borrowers.

Is price really an issue for all businesses? It's not necessarily a chief concern, according to a source at one of Britain's four major High Street lenders. So it remains to be seen how much of an impact it (the NLGS) will have.


Osborne's other ambitious plan to siphon off some of the 1 trillion pounds held by British pension funds into infrastructure projects, has also been beset by complications, with funds reluctant to commit cash until there is greater clarity over how schemes will be run.

The sums involved are large and the timescale lengthy, and there's a high degree of uncertainty, so it's no surprise that people are being cautious, said Andrew Milligan, head of global strategy at Standard Life Investments, which manages assets worth around 155 billion pounds.

And even if funds were prepared to invest, the long lags involved in building roads and railways, for example, mean the economic benefits would not be felt for some time.

We might see the building blocks being put into place in the remainder of this parliament, but the majority of the benefits would not appear until the next parliament, Milligan said.

(Additional reporting by Adrian Croft and Sudip Kar-Gupta; editing by Ron Askew)