THE Royal Bank of Scotland should be split up to create a new "British Business Bank", Vince Cable has said in a leaked internal Coalition letter.

In his letter, sent to Prime Minister David Cameron and his deputy Nick Clegg on February 8, the Business Secretary criticised the UK Government for lacking a compelling vision of where the country is heading.

The proposal by the Liberal Democrat frontbencher places him at odds with Chancellor George Osborne, who wants RBS – 82% owned by the taxpayer and subject to a £45.5 billion bailout – sold back on to the market as soon as possible.

Mr Cable wrote: "My suggestion is that we recognise RBS will not return to the market in its current shape and use its time as ward of state to carve out of it a British Business Bank with a clean balance sheet and a mandate to expand lending rapidly to sound business.

"We should be willing to use such an institution to support our other industrial objectives such as supporting exports and sectors identified as of strategic importance."

Yesterday evening, Mr Cable responded to the leak by insisting he had merely been "floating an option" in the letter.

"There is a real problem with funding small and medium-sized enterprises," he said. "The particular initiative the Government is taking at the moment is the so-called credit easing initiative, the Chancellor is going to set out all the details of that in the Budget but there are various other options and I was floating some in that letter."

Chuka Umunna, his Labour Shadow, suggested Mr Cable's call for RBS to be split up was "a similar policy to Labour's idea for a British Investment Bank".

He said the leaked letter underlined "the extent to which the Department of Business lacks clout" and added: "It is becoming increasingly clear that David Cameron and George Osborne have become roadblocks to the modernisation and reform needed to create a more productive economy."

In a separate section of the letter, Mr Cable refers to how the North Sea oil and gas industry felt it had been taken for granted "despite generating vast investment and supporting impressive supply chains with unexploited potential – shale gas".

In a reference to the independence debate, he said: "We need to remain sensitive to the Scottish dimension with the perception that Alex Salmond cares and London doesn't."

More generally, Mr Cable said the UK Government needs to show "more leadership" in supporting key technologies.

While he made clear the Coalition is united around its economy strategy which is attracting widespread support, he went on to say: "I sense, however, that there is still something important missing – a compelling vision of where the country is heading beyond sorting out the fiscal mess; and a clear and confident message about how we will earn our living in future."

Meanwhile, earlier at Treasury Questions in the Commons, Mr Osborne defended the removal of child benefit from top-rate taxpayers, saying it was right for "the top 15% of the income distribution to make a contribution to the fiscal consolidation".

Ed Balls, the Shadow Chancellor, claimed the move was unfair because two lower-rate payers would continue to receive the benefit even if their combined income exceeded the £42,000 top rate threshold.