It’s been a long 5 months since the drama and political intrigue of the General Election. Most political debate has been about public sector cuts but, until now, no one had really known what they would entail. As far as small and medium businesses are concerned, are we really any the wiser following the Comprehensive Spending Review?
In my view, the three main issues facing SMEs at the moment are the state of the economy as a whole (and in particular demand for our products and services), the availability of finance (particularly bank lending) and the lack of stability in the economy (will it grow or can we expect a long period of little growth or even a double-dip recession?).
The Comprehensive Spending Review said a lot about public sector cuts and reducing the fiscal deficit, but offered very little direct help to SMEs.
According to the Federation of Small Businesses, 75% of small businesses support the cuts as a way to tackle the public sector deficit. Certainly, this should mean that the UK can continue to attract international investment, which in turn will mean that interest rates will remain lower than would otherwise be the case. This can only be of advantage to businesses.
Although the immediate effect of the cuts will be to lower overall demand in the economy, the hope is that, in the longer term, conditions will be much better for economic growth. This is where most political and economic debate is focused: how much will be the depressing effect on the economy, and how much will it improve in the longer term? The simple answer is that no one really knows.
Of course, those SMEs who provided work for the public sector are unhappy. According to a PeoplePerHour.com survey, 60% were pessimistic about picking up public sector contracts, and some 75% were concerned that the bureaucracy of public sector tendering was off-putting.
As far as obtaining finance is concerned, the Government seems unable to get banks to start lending again in a helpful way. It has said though that it will make £150m available to businesses over the next four years to help them access loans and equity investments, mainly through the Enterprise Finance Guarantee. Further money will be made available to “small businesses with growth potential” but there is no clear indication of what this will mean in practice.
It still seems that the Government does not appreciate the importance of SMEs to the economic recovery. Between 2002 and 2007, 80% of jobs in the EU were with the SME sector. It is therefore the SME sector that is best placed to find the new jobs for the 500,000 public sector workers who are predicted to be made redundant. With more direct Government help, this is more likely to occur, which, in turn will increase tax receipts and lower benefit expenditure, as well as help the economy grow faster.
What is needed is more direct help for SMEs both directly and indirectly. Reducing National Insurance contributions for SMEs taking on new employees would help. Cutting VAT to 5% in the construction sector would help this still ailing industry. And most importantly, it’s time for the Government to get serious about making banks do their job of lending again.
Tackling the public sector deficit is clearly essential but not enough on its own to kick start the recovery the SME sector so badly needs. When will the Government start listening?
Have your say: join in the debate on the spending review by commenting on the Cousins Business Law blog.