On balance, it is probably fair to say the 2010 Budget will be welcomed by most as a small business-friendly one, although the devil will be in the detail.
On balance, it is probably fair to say the 2010 Budget will be welcomed by most as a small business-friendly one, although the devil will of course be in the detail. What is interesting is that it appears to benefit entrepreneurs more than it does the owners of small, lifestyle businesses.
That can sometimes be a fine distinction, but it corresponds to a move from the defensive (“saving” SMEs from the recession) to the offensive (enabling entrepreneurs in the recovery). Governments around the world need to start refocusing their efforts towards the latter and it is good news that the UK Government is doing this.
Cuts now v. cuts later – but no details
Small business owners know that public sector spending will have to fall, one way or the other. They also know that this will eventually hit them as well, regardless of whether or not they are government contractors or receiving some kind of subsidy.
The Chancellor made much of the timing of the fiscal tightening to come, but in reality – as the Liberal Democrats pointed out – businesses, investors and indeed the financial markets want to know the details now – and any delays are bad for the economy.
For a small business, knowing the details is about planning – how are your customers going to be affected? What could be the impact on demand? Is your local area particularly vulnerable? Are there any opportunities involved? Inevitably, hiring and investment decisions will be put off until this kind of detail emerges – which the UK economy may not be able to afford.
On the bright side, and by way of compensation for the lack of detail, the Chancellor also signalled that any further windfalls will be used to pay off debt, not to fund some kind of war chest. This is a relief of sorts. Government may have undershot its borrowing target, but it is not as though some spare change has turned up in the sofa; it is more like the bailiff turned up and said they would not be repossessing the sofa just yet.
“Entrepreneurs’ combo” at the heart of 2010 Budget…
The “entrepreneurs’ combo” of higher entrepreneur Capital Gains Tax (CGT) relief and investment relief thresholds, as well as a cut in business rates, will almost certainly receive a warm reception from SMEs. Many owners of, and investors in, SMEs will also have breathed a sigh of relief when it was announced that the main CGT rate will not rise. The tax measures are all solid incentives to start and grow a business and they are going to be very useful in the recovery. Business rates, on the other hand, have given the Chancellor a headache before, as the pre-recession spike in inflation fed through to them, and small businesses have been worrying that with inflation rising again that situation would be repeated.
However, what is perhaps most encouraging of all is the renewed emphasis on equity finance. Since the recession began, whenever small businesses have lobbied for better access to finance, they have tended to mean debt – bank loans, to be precise. That is only fair, as for the majority of SMEs, that is all there is to it. But entrepreneurs know it is impossible to build new, world-beating industries on bank loans, or on government guarantees and deferred tax for that matter. Knowledge-intensive, innovative, high-risk start-ups in the new industries the Chancellor has set his eyes on can bleed cash for years before they turn a profit – which is why they need equity investment.
Finally, entrepreneurs will have been relieved to discover the Chancellor has not forgotten about the Glover recommendations for improving SME access to the public procurement market. This is an effective way to encourage innovation and a way to tackle the Government’s green objectives – and with more competition the taxpayer could get better value for money as well. This, of course, is compromised slightly by the fact Government departments are no longer subject to procurement capability reviews by the Office for Government Commerce (OGC), which would help embed the Glover agenda in Government, but are rather allowed to self-assess.
…but plans for a further tax on job creation go ahead
Not everything in the Budget was good news, however.
Small employers or businesses hoping to hire their first member of staff would have liked to see the planned National Insurance Contribution (NIC) increase shelved, or even a reduction in NIC, as a further incentive to create jobs. Hearing the Chancellor’s remarks on first-time buyers in the property market, long recognised as a group worthy of protection, entrepreneurs must be wondering why first time employers are not held in the same regard. The Chancellor said himself that “unemployment is too high a price” to pay for a quick return to healthy government finances and that was his best chance to put his (or the taxpayer’s) money where his mouth is. He missed that chance.
By “protecting” those earning £20,000 or less from the NIC increase, the Government is at least helping contain the risk of a substantial rise in unemployment or inactivity among young people, but it is also providing an incentive for employers to create lower, rather than higher, value-added jobs or to keep wages artificially low.
The Chancellor rightly acknowledged the efforts employers have made to save jobs. Small businesses, in fact, have a much better record of doing this than larger businesses, but no Government should take that for granted. There is no guarantee that the current downward trend in unemployment claims will continue, especially once budget cuts get underway, while there is every reason to believe that the downward trend in employment will continue.
… and another, bigger round of SME loan commitments
Small businesses are always a little cynical when the Government announces it has arm-twisted the part-nationalised banks into a commitment to lend more to SMEs. To be very clear: there are still problems with SMEs’ access to finance –the Business Payments Support Service (BPSS) is in much demand and even the less successful Enterprise Finance Guarantee (EFG) serves a real purpose. But frankly most small business owners do not expect Lloyds TSB and RBS to meet their SME lending targets – which add up to £47bn of additional gross lending – and even meeting these targets may not be such a good thing.
First, the banks’ record at predicting demand from SMEs during the recession is quite poor (except perhaps for credit card debt), and on average lenders’ expectations have usually turned out to be overly optimistic (See graph). As for the Government, they need to be honest about this: do they know how much debt the SME sector is good for right now? Or how much it can use in a profitable and sustainable fashion? Have they realised there was too much debt in the system, including the SME sector, before the crisis?
Second, small businesses are still not too eager to take on debt. They do not trust banks as much as they used to; they have postponed or cancelled their investment plans; they have tightened control over their cashflow and tried to get more credit from their suppliers. Without strong demand for loans, there are only so many ways to get the banks to lend more. The best are to provide them with more and better information, or more capital, or to at least hold them up to higher standards of customer service.
Failing that, however, banks would have to encourage more SMEs to apply for loans, which risks mis-selling, as highlighted very recently by the Scottish Affairs Select Committee; or they could relax their requirements in terms of credit scoring, security and covenants, which risks serious amounts of bad debt (which is already rising and which the taxpayer is exposed to); or they could focus on giving out larger loans, which risks both of the above. None of this is good news for a small business owner who is in it for the long haul.
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