16 June 03
Speech by the Chief secretary to the Treasury, Paul Boateng MP, at the International Council for Small Business
1. I am very pleased to be able to join you this morning. The International Council for Small Business is an influential partner of governments and companies across the globe in promoting rigorous analysis of what works in supporting enterprise. This week’s World Conference is an excellent opportunity to develop links between entrepreneurs, experts, officials and other stakeholders.
2. It is fitting that The ICSB has decided to hold its annual Conference in the UK this year for the first time in 48 years – and I am delighted that the conference is being held here in Northern Ireland. Northern Ireland ministers and I are committed to promoting small business and entrepreneurship here.
3. These are challenging times for business, large and small. Many of the world’s major economies have been in recession. A hesitant global recovery has been stalled, oil prices have fluctuated widely, world trade growth has been slow and, partly because of the political uncertainties, equity markets have been volatile.
4. This was the context of the Deauville meeting of G8 Finance Ministers in May, where there was much consensus amongst us as Finance Ministers– both on the economic climate and on the way forward, especially the need to achieve higher rates of growth. Our assessment in the UK is that the second half this year will see the global recovery gathering pace – led by a pick-up in growth in the US.
5. In recent months, a number of major risks to recovery have receded, including uncertainties over SARS and military operations in Iraq. This has been accompanied by signs of a recovery in business and consumer confidence. So with inflation low, the geopolitical uncertainties lessening, oil prices on a downward trend and action over corporate standards, we are seeing several of the obstacles to higher growth being removed.
6. Now, a key priority must be to capture the benefits on offer from further trade liberalization. That means delivering on the commitments made at Doha in 2001, which could add more than $400 billion to global income. The WTO Ministerial meeting in Cancun this September will mark a crucial half way point in the current trade Round. We must remind doubters of the gains on offer and the serious consequences of failure, at a time when the global economic outlook remains uncertain.
7. In all our countries, enterprise is the engine of growth. In the UK Treasury, we see our task as creating the right framework for businesses to compete and succeed, driving up productivity and growth.
8. This week’s theme, “Advancing Entrepreneurship and Small Business”, is very much part of mainstream economic policymaking in Treasury, and last autumn we published, together with the Department of Trade and Industry, a White Paper “Enterprise Britain” setting out our strategy for promoting entrepreneurship.
9. Yet it is only a couple of decades since economists and governments tended to dismiss small business altogether, and the trend towards aggregation of firms and production facilities seemed unstoppable – partly thanks to Government policies in the 1960s and 1970s which were geared to encouraging large-scale production.
10. As we all know, this picture altered rapidly in the 1970s. Globalization advanced, hand-in-hand with a resurgence in small business activity. In the UK, the 1970s saw SMEs become the principal engine of employment growth. By the late 1990s, they accounted for over half of all job creation in expanding firms. The number of small and medium sized firms has risen to around 3.75 million today from 2.5 million in the 1970s.
11. No single factor can explain this striking expansion. One cause was certainly the relative growth of service industries - but within manufacturing, too, there has been a shift towards smaller enterprises, assisted by advances in plastics, electronics and computing technology.
12. As world trade growth outstripped world economic growth over the last 30 years, international competition provided a further spur to smaller business, encouraging firms to specialize in those core activities where they have the greatest competitive advantage.
The SME sector today
13. Today small and medium-sized enterprises account for more than half of the private sector’s turnover and over 55 per cent of private-sector jobs.
14. But despite this rapid growth, rates of entrepreneurial activity in the UK remain only moderate by international standards. The proportion of working-age adults engaged either in starting a new business or in running a young firm is close to the European average, but barely more than half the level in the US.
15. What is more, there are wide disparities in entrepreneurial activity between regions, with the rate of start-ups in the UK’s least enterprising areas ten times lower than in our most enterprising areas. The Bank of England reports that there is a clear-cut relationship between deprivation and a lack of entrepreneurial activity in the 50 most deprived local authorities in our country. So the evidence is clear: low levels of enterprise have both an economic and a social cost.
16. If we are to address the challenge of widening economic opportunity for all the regions and nations of the UK, we need to see enterprise as a foundation.
Drivers of productivity
17. In this year’s Budget Speech the Chancellor made clear that the “productivity challenge” – narrowing the gap that remains between the UK and our major competitors – will be a central priority for our government in the medium term. That is why we have introduced a series of targeted micro-economic reforms focused on the five key drivers of productivity – investment, enterprise, innovation, competition and skills. Enterprise not only drives productivity directly, but is also a spur to innovation and competition.
18. As new firms enter the market and their less productive rivals leave it, resources and market share are reallocated from inefficient to efficient producers. Evidence shows that this process of “productive churn” may account for as much as half of labour productivity growth in the UK over a twelve year period. By international standards the UK has a relatively high churn rate – and studies show that higher rates of firm entry and exit are associated with stronger economic growth.
19. The competitive threat posed by new entrants and existing SMEs is therefore an important driver of productivity growth within larger firms, as well as their rival SMEs. It keeps the big boys on their toes. A recent OECD review pointed to a robust and positive link between product market competition and productivity.
20. Small firms are also important as a source of product and process innovations. Of course, not every coffee shop owner dreams of building an empire to rival Starbucks. But a proportionate number of SMEs are highly innovative, generating and diffusing new ideas and technologies. Some of these we know will make the journey, as your Conference brochure puts it Mr President, “from local heroes to global champions”.
Role of government
21. Given all this, what should government be doing to promote entrepreneurship and small business?
22. Naturally, every country will have particular concerns, arising from different consumer bases, different tax structures, differing priorities. In the UK our approach has 3 basic dimensions.
23. Firstly, we want to develop a stronger culture of enterprise in society.
24. Secondly, we aim to use the macroeconomic, tax and regulatory frameworks to allow vigorous markets to flourish.
25. And thirdly, where clear market failures occur, we will undertake specific micro-economic interventions.
26. Today, I would like to say something about how we see our role in each of these.
Building an enterprise culture
27. To begin with an enterprise culture - all the indications are that the vast majority of the UK public, especially young people, hold very positive views of entrepreneurs. That’s good news. We want to encourage the spirit of entrepreneurship amongst young people. But for all the admiration which the likes of Sir Richard Branson and Stelios Haji-Ioannou enjoy, surveys suggest that less than half the population believe they themselves could start up a business - and people who have little experience of enterprise are most likely to think it is not for them, a particular obstacle in poorer communities.
28. That is why we are convinced that efforts to build a deeper and wider entrepreneurial culture must begin in schools. That is where Ken and I first met and it is so important. The UK is behind some other countries in this, and while some schools run excellent programmes, fewer than 30 per cent of young people gain any enterprise experience at any point in their school careers.
29. That’s why we have allocated additional resources to the Department for Education and Skills to ensure that every child has some experience of business and enterprise before leaving school.
Getting the framework right
30. Of course we have got to get the framework right. Government cannot engineer a successful small business sector, through education or by any other means – this can only come about through the ideas and drive of many thousands of business people. But Government is responsible for getting the framework right, across the areas where its policies impact on enterprise: through macroeconomic stability, a low regulatory burden, an effective competition regime and a tax system with the right incentives. To free you to do the business.
Macroeconomic framework
31. In the past, the UK suffered from chronic “stop-go”, with marked volatility in output and demand, which hit smaller firms hardest– especially those with limited cash reserves – hardest.
32. To address this legacy, the Government under Tony Blair and Gordon Brown moved quickly in 1997 to establish macroeconomic stability, with a new framework for monetary policy - an independent central Bank and tough new rules on Government borrowing.
33. We’ve kept to those rules. The result is this framework has served as a platform for higher real-terms business investment, and helped to raise company survival rates.
Low regulatory burden
34. But that is not enough. Regulation is, of course, necessary to meet a host of public policy objectives, including support for business. But excessive or poorly implemented regulation we know can stifle enterprise.
35. While the UK is acknowledged to be a relatively lightly regulated economy. Indeed it is based on US heritage foundation and I congratulate our Government in that regard. We recognize the need to do more, especially to address the needs of smaller firms.
36. That’s why the Government has found it necessary to account. The Government has started with holding its own Ministers to account for the burdens they impose on business, through Regulatory Impact Assessments and a Ministerial Panel of Regulatory Accountability. There are simple things we can do too, such as including all major regulations for new businesses in a single booklet.
Start up pack waved
37. The Small Business Service is working closely with other departments and agencies to make information accessible, and you’ll be hearing more from Nigel Griffiths in due course.
Competition
38. Alongside our regulatory reforms, we have established a vigorous competition regime to help drive up productivity. A strong competition regime means that small businesses can operate on a level playing field – where new ideas have their fair chance and productive churn is enhanced.
Tax system
39. We have also modified our tax system. The French statesman Colbert remarked somewhat cynically observed that taxation was like plucking a living goose – that the only goal was to extract the maximum amount of feathers with the minimum fuss. But in reality it is something more than that – taxation sends clear signals about the economic activities which governments believe should be encouraged and discouraged, and the values they wish to entrench in society.
40. This is why we have introduced significant reforms to modernise the tax system in order to provide the right environment for business investment. Enterprise is risky – the rewards need to reflect that. In addition to low corporation tax rates, the Government has introduced permanent 40 per cent first-year capital allowances for SMEs, bringing forward tax relief and providing a cashflow boost to fund investment in plant and machinery.
Rationale for micro-level intervention
41. Overall, we believe this is the right framework. It has enabled the UK to withstand turbulence in the global economy better than in the past, and our growth this year is expected to outpace our major European competitors. In general, our approach is that if the Government gets the framework right, markets should do the rest. But we should not be afraid of intervening in cases where there are clear market failure – situations where rational choices that businesses make add up to an outcome that puts the economy as a whole at a disadvantage.
42. Our Government accepts the rationale for targeted micro-economic interventions.
Skills
43. Important because the ability to recruit and retain a workforce with the appropriate skills is a key determinant of business success and productivity growth.
44. In the UK, the proportion of workers with high skills compares well with our competitors, but over a third of our workforce lack intermediate skills despite doing well at high school, compared to under 20 per cent in Germany, and around 10 per cent in the United States.
45. We recognize that the day-to-day pressures of running a business can discourage employers in small companies from investing in staff development which could bring benefits in the long term to all concerned.
46. So we have introduced Employer Training Pilots are allowing businesses to access free training, information and advice, with subsidies to meet the costs of staff taking time off to gain basic or intermediate skills, with higher rates paid for SMEs. The Pilots are at an early stage: so far, 72 per cent of the firms who have signed up have fewer than 50 staff, precisely the group where the lower and intermediate skills shortage is most acute.
Innovation
47. Another market failure occurs in innovation: the long term benefits, to individual firms and the wider economy, are hard to overstate – but small businesses often face barriers in meeting up-front costs and in capturing the full benefits.
48. To address this, we have introduced a tax credit to support innovation among SMEs, worth up to 24 per cent of R&D costs.
49. We are also working to strengthen links between universities and enterprise, with funds to support knowledge transfer activities, such as equity funding for university spin-out companies and promotion of enterprise skills among science and technology students.
Access to finance
50. But thirdly, we are aware that new businesses requiring start-up funding, and smaller businesses with strong growth potential, face particular problems in accessing the necessary finance – whether a loan or equity.
51. Our approach is to work with existing markets, rather than in place of markets. For businesses that lack the collateral which bank lenders require, we continue to improve the Small Firms’ Loan Guarantee Scheme, supporting over 4,000 loans each year.
52. To address the shortage of equity finance for individual investments below half a million pounds, government-supported Regional Venture Capital Funds are investing up to £270 million in SMEs across England.
53. As with debt finance, the difficulties in attracting venture capital are most intense in disadvantaged areas. The Government has therefore invested a further £20 million in the Bridges Community Development Fund, matched by £20 million from the private sector.
54. And in the last Budget we launched a consultation document, ‘Bridging the Finance Gap’, containing proposals to adopt Small Business Investment Companies, which now account for 58% of equity investments in the US.
Conclusion
55. So these are exciting times. The contribution of small business to economic growth and civic society is multi-dimensional, so government policies also need to think holistically. Where there are clear market failures, we should not be afraid of making carefully targeted interventions, but always working with markets, getting the incentives right, not working against them.
56. Our success as a Government in the twenty first century will be judged by whether we meet the productivity challenge and deliver higher rates of dynamism and growth. If we do of course, Government can only claim a fraction of the credit – because once the framework is in place, economic success is down to the disciplines and creativity of you in business and, in today’s enterprise economy, particularly businesses representatives here – SMEs.
57. This is exactly what this Conference is about. I very much hope you enjoy your time in Belfast and that you find the Conference a stimulating and insightful experience. I would like to wish you every success in celebrating contribution to experiences of global economics. Your dedication is essential to the success of globalisation and welfare of all our people. Thank you for choosing Northern Ireland for the conference and thank you for all you are doing.