The Disraeli Room

The Disraeli Room

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Budget 2013: Small steps for small business support

26th March 2013

Bolder measures are needed to support SME growth, argues ResPublica's Lorena Papamanci

Small and medium enterprises (SMEs) could be the salutary lifeboat that the British economy needs for its lengthy recovery, but the current Government hasn’t yet been able to produce an aggregate policy offer to support them. Does George Osborne’s budget “for people who aspire to work hard and get on” also serve the needs of small businesses or would they have to keep waiting?

On Wednesday, 20th March, the Chancellor delivered his Budget to Parliament and announced it was “a Budget for our Aspiration Nation”. And, while Osborne’s speech did include several encouraging proposals for the British business environment, a lot of problems are left unsolved, with business rates going up for the third consecutive year and access to finance for SMEs getting worse.

SMEs have been in the focus of policy-makers worldwide for several decades now, while a plethora of academics have praised their relative advantages over larger companies. They create more jobs even in times of recession, they represent more than 99 per cent of all businesses, they contribute massively to the GDP and they innovate more. Only in the UK, the top 6 per cent SMEs create 54 per cent of all new jobs, 64 per cent of all commercial innovations come from SMEs and SME economic activity accounts for almost half of the private sector’s turnover.

Therefore, it seems only natural for the budget to include as many measures to support SMEs as possible, especially since the macroeconomic forecasts have been downgraded from December last year at the Autumn Statement. With the deficit at 7.4 per cent of GDP, instead of the predicted 6.9 per cent, borrowing at £114bn this year and higher than last year’s predictions and the GDP growth negatively adjusted to 0.6 per cent instead of the 1.2 per cent forecast in December 2012, Osborne needs all the help he can get from SMEs so as to avoid another downgrading in the next few months.

So, what has the Chancellor proposed? Scrapping the fuel duty increase, upgrading the infrastructure, cutting the financial transactions tax, offering more support for the Seed Enterprise Investment Scheme which provides incentives to investors in start-ups, launching the Business Bank and other financial schemes and cutting the corporation tax. While these are all steps in the right direction for the British business environment, most of these measures are directed at larger companies and those that target smaller businesses will only take effect in 2014 the earliest.

The most prominent announcement – reducing the main rate of corporation tax to 20 per cent from 21 per cent – does not benefit most small businesses at all, since the cut only applies to profits over £300,000. So, the Chancellor might argue that he has delivered “the most competitive business tax system of any major economy in the world”, but it’s not for small businesses. In fact, this means that come 2015 small and big businesses will pay the same rate.

The best targeted measure for SMEs in this budget was cutting employers’ national insurance bills for the first £2,000. This means that an estimated 450,000 small businesses will pay no national insurance contributions at all for their first employee with a £22,000 annual salary or for four employees on minimum wage.

This measure indeed comes in recognition of the impact small businesses have on the labour market and it is especially relevant for the current employment context, with the OBR announcing a rise in unemployment levels.

However, the Chancellor should have gone even further and follow the example of Germany’s successful strategies in promoting business start-ups by the unemployed. The ‘Bridging Allowance’, offering entrepreneurs the same amount that they would have received as unemployment benefits for a period of six months and the ‘Start-Up Subsidy’, offering recipients a monthly allowance for the first three years of their business activity have been hugely successful and have contributed massively to Germany’s low unemployment rate – second lowest in Europe.

Another pressing issue is access to finance for SMEs, which has been getting worse, despite the Government’s numerous attempts at sophisticated strategies and financial schemes. Currently, more than one in four British SME employers are seeking finance on the private capital market, out of which 56 per cent need the funding for working capital or survival purposes. Needless to say, a large proportion of them were turned down.

Vince Cable’s Business Bank, the Treasury’s consultation on a new system of competition-focused regulation for payment systems and the FSA’s review on barriers to entry for new banks represent viable alternatives to the ‘Big Four’ which consistently attract (and decline) the majority of SMEs financing applications. However, plans for the implementation of such projects expand until the end of 2014, which might be too late for a great deal of currently struggling small businesses. The banking sector needs an immediate and radical reform, concentrating on regional banks lending to local small businesses, whereas venture capital could instead be considered to fund higher-risk start-ups. These strategies have been hugely successful with SMEs in economically developed regions such as Lombardy (Italy), Singapore and Israel, yet they have been insufficiently explored in the UK.

A final policy aspect where Britain is lagging behind other developed economies is SME share in public procurement. While the US has legally reserved, since the 1980s, 24 per cent of public procurement contracts to SMEs and in France more than 45 per cent of the total value of public contracts awarded goes to SMEs, due to their innovative e-procurement system, British small businesses have to jump through several hoops before being considered as eligible candidates for such contracts and only find comfort within the Social Value Act. Instead, promoting greater SME involvement in public service delivery would support the British business environment, while also increasing public sector competitiveness.

These proposed measures are bold, revolutionary and localised and therefore most likely to support high-risk, high-return, local investments in small businesses. However, while the 2013 Budget does offer hope for small businesses, it lacks just that: urgency, boldness, and – most importantly – delivery.

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