For a government that has done its utmost to woo growing businesses, the coalition has so far fallen woefully short of winning them over.
According to recent research from accountancy firm RSM Tenon, owners and managers of SMEs vented their frustration at the lack of practical support being offered by the government, with around 40 per cent saying the coalition was having either a ‘negative’ or a ‘very negative’ impact on their ability to succeed.
Chancellor George Osborne tried to hold out an olive branch at the recent Conservative conference in Manchester by proposing a scheme of ‘credit easing’ for SMEs unable to access loans. But this gesture failed to stop the groundswell of grumbling that this government is simply not that interested. Indeed, the Federation of Small Business issued the terse response that the measures were ‘timid and incoherent’ – hardly the rapturous applause that the chancellor would have been hoping for.
Down in the slump
So why does the government seem to have got it so wrong? Part of the answer is, of course, the economic slump. The coalition took power last year and ushered in the ‘age of austerity’. We looked forward to ‘smart’ rather than ideological public sector reform focused on driving more efficiency and less waste. Key to this was supposed to be effective engagement with the private sector, and SMEs in particular.
But of course the crash has been followed by virtual stagnation in the economy and the threat of a return to recession. With little money in the Treasury coffers, what is now needed is the economic equivalent of a defibrillator, and fast.
There is no constituent of the economy more likely to provide such a stimulus than SMEs. They are, after all, the engines of the economy and can grow quickly enough to reduce unemployment while also exporting their products and services. I am talking about those companies with a proven and scalable business model as well as several years of profitable growth. Those are the companies that are the great hopes for the future. And they need support now.
If one looks around, one cannot get past the sense that the regulators, the economy and small companies are all pulling in different directions. New regulations are pushing the bankers to hold more cash relative to their liabilities; however, rather than raise expensive capital, the bankers’ response is to shrink their balance sheets, exactly at the same time as SMEs desperately need working capital in order to grow. To compound the problem, big companies are hoarding cash and paying their suppliers late.
The Business Growth Fund is all very well but it is focused on a tiny percentage of companies that want equity capital – which is a mile away from what most SMEs need. And it is so early in the development of the credit easing measures announced in recent weeks that there is no clear idea of how they would work in practice.
MPC member Adam Posen has called for the establishment of a state-funded SME bank. I am strongly in favour of this as I believe that it has worked well in other countries such as the US and Germany.
In the UK we have a fundamental structural problem – a highly concentrated banking sector – which is why it is appropriate for the government to step in to address this market failure. We need a bank that can take a 25-year view and can bridge the funding gap with working capital and loans for this important section of our economy.
Open for business?
While they are at it, perhaps this government could also do what every government has talked about and give SMEs access to government contracts. The coalition promised that 25 per cent of all contracts would be opened up but it is probably less than 10 per cent, if that. Let us either lever open the door or stop talking about it.
The same could be said of public service reform and delivery. Reform is a word that is all too regularly used, but just look at the coalition’s track record; one of its key initiatives in health was stopped in its tracks following a major U-turn by Nick Clegg. What we are left with is a totally unsatisfactory ‘pause’ which, given the crisis facing the sector, is akin to fiddling while Rome burns.
Reform is hard. It is simply too easy to wrap everything up in red tape and then say that change is difficult. The reality is that in the West we are addicted to regulation. Just trying to reduce the rate of increase that seems to be the Department for Business, Innovation and Skills’ approach is not good enough. We know that regulation is a huge drag on economic growth, and we should focus on reducing the absolute cost across the board.
Finally, if we believe that SMEs are the key to our future revival and prosperity then we really should make it worth their while to do business. At 28 per cent, we have one of the highest rates of capital gains tax in the developed world. It is not a popular message in today’s Austerity Britain, but it is a barrier to risk taking and needs to come down.
Wol Kolade is managing partner of ISIS Equity Partners, having joined in 1993. His role encompasses overall responsibility for the strategic development of ISIS and active involvement in investments. He was chairman of the BVCA in 2007/08, is a governor of the London School of Economics and Political Science, and is a trustee of the Guy’s and St Thomas’ Charity.