It’s still the economy, stupid
Rebecca Harding 21st March 2011
As the G7 economy with the most stringent budgetary retrenchment package, it is easy to see the inherent contradiction in UK government rhetoric at the moment. According to George Osborne in his pre-budget press statements this weekend there will be “no U turn”; no retreat from the deep cuts to the public sector that have yet to take effect, and no retreat from the current fiscal retrenchment. Yet the budget is unapologetically a budget for growth. Is this a paradox or is it possible to cut and grow at the same time?
Around the time of the budget, we hear the habitual baying of the entrepreneurial and small business lobby about regulation and tax but the economy still matters to entrepreneurs. New research from Delta Economics’ Challenges and Opportunities for Growth and Sustainability study (COGS) 2011, suggests that while entrepreneurs are concerned about the negative impact that tax and regulation have on their businesses as they grow, the over-riding concern remains the macro-economy. 1,000 entrepreneurs have been interviewed through the three years of the downturn, and 63% say that the macro economy was the key challenge when they started their business while a further 45% said that it had impacted negatively or very negatively. 41% said it had been difficult to manage and just under 20% who said it was easy to manage. These figures have not changed for the last three years and compare unfavourably to respondents in Europe where just 55% had said that the macroeconomic environment was a challenge. The Chancellor when he stands up to present his budget, cannot ignore the fact that entrepreneurial businesses are still feeling the effects of the downturn.
Growth relies on businesses being confident enough to take risks to grow. This is determined by three things. First, macro-economic expectations of how demand will grow or prices change will affect this confidence. The COGS study shows that only 15% of entrepreneurs are actually looking for finance at the moment, a figure which is unchanged on last year. In other words, there is no great appetite to invest in growth amongst the small business community. They remain wary of the impact that the current cuts will have on demand for their products or services and are holding back accordingly.
Second, the role of tax in creating confidence cannot be understated. As the Office for Tax Simplification noted in its pre-budget report launched at the end of last week, small businesses do find the complexity of the current tax system over-whelming and this undermines the certainty that is a pre-requisite for them to prioritise growth strategies. If profitability or capital gains are taxed heavily, or if companies with turnovers of less than £1m are required to pay national insurance for their employees, it militates both against growth and job creation. 52% of entrepreneurs in the COGS survey said that the tax regime impacted their business negatively and this compares to 45% in the UK last year and 44% in Europe. While some of this may be due to the fact that people are seeing higher VAT impact on their profitability, tax simplification for investors and entrepreneurs alike is a pre-condition of a buoyant entrepreneurial community.
Finally, the long term framework for business growth has to be strong and this is where the real challenge for the Chancellor remains. While the stance on cuts remains aggressive, there is potential for the long term growth potential of our entrepreneurial businesses to be undermined. At a time when Germany and the US are investing more in education and training, the UK is cutting back on university funding and playing catch-up with the rest of Europe (Germany in particular) in terms of apprenticeships and on-the-job training. 19% of the entrepreneurs in the COGS survey used the science and innovation base in Higher Education – significantly lower than the 25% in Europe. Similarly, 35% of founders of these growth businesses said that trying to access the right skills had impacted negatively or very negatively on their business. Again this compares unfavourably to Europe where the figure is just 27%.
The Chancellor has made tax simplification and skills development priorities in his recent press releases about the budget. It is almost a truism to say that these are important for business, though. Of more importance is a prolonged focus on long term economic growth. As yet the government has been so focused on deficit reduction that a real strategy for growth has yet to become obvious. Without it, the paradox that is current UK economic strategy will continue to plague our entrepreneurs.