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Dr Benjamin Reid
Senior Researcher, Big Innovation Centre
T 020 7976 3552
Dr Benjamin Reid

Misfire: targeting potential high growth SME firms in the Autumn Statement

Authors: Dr Benjamin Reid Dr Benjamin Reid

29 November 2011

The ‘vital 6%’ of high growth firms in the UK, it has been said, are responsible for up to half of new job growth.  That 6% are, almost exclusively, Small or Medium Enterprises (SMEs) – at least when they start their growth spurt. So how is the pool of ‘potential’ high growth SME firms in the UK likely to be feeling following George Osborne’s 2011 Autumn Statement, and what are the implications of its prescriptions for their opportunities to innovate and create jobs?

We can start by understanding the barriers to high growth faced by SMEs. The Work Foundation’s Neil Lee has recently published in-depth work (pdf) in this area for NESTA, which provides clear evidence of those barriers – the key ones relate to a) finance: obtaining it in a timely manner to maintain cash flow, and b) to skills: being able to source and recruit the right people. So how do Osborne’s announcements address those concerns? Two areas seem relevant to these barriers:

  • Changes to access to finance for SMEs: Under the banner of ‘credit easing’, Osborne suggests a National Loan Scheme with government guarantees underwriting bank funding; a £1bn Business Finance Partnership to invest in SMEs through non-bank channels; and a Seed Enterprise Investment Scheme Tax, which provides personal tax breaks at 50% rate for those investing at least £100,000
  • Changes to employment law that affect SMEs from the autumn statement (all well trailed in the media before today): a no-fault compensated dismissal process (e.g. firing people without (needing to give) cause, but with some cash compensation for businesses with fewer than 10 employees; an easier dismissal process for other, larger businesses , and a ‘rapid resolution’ employment tribunal scheme.

If they are taken up sufficiently (unlike, it has to be said, other government loan underwriting schemes introduced since the credit crunch), Osborne predicts the National Loan Scheme could see £20bn channelled to UK business over the next 4 years. The proportion likely to go to SMEs isn’t entirely clear, but the prediction is for the scheme to lower borrowing rates for most SMEs by 1% overall. However, this does assume that is has been the cost of financing which has prevent access to finance, rather than the perception of risk banks have of lending to SMEs. The government guarantee might give banks greater confidence – but they have to see a strong likelihood of returns across their portfolios of SME loans because these remain commercial loans; something only likely if larger numbers of SMEs are experiencing greater demand. Both the Business Finance Partnership and the Seed Enterprise Scheme seem positive moves, likely to assist the venture capital base of the UK, and improve the financial link between small and large enterprises – but the proof will be in take-up for investment in genuinely potential high growth firms.

The changes to employment law are more problematic: they seem to assume the barrier to SMEs’ hiring are fears that, having hired, they won’t be able to get rid of people if they want / need. If that ‘risk’ was lowered, more hiring would take place, seems to be the logic. Yet is it insufficient talent and skills which dog potential high-growth SMEs, not an issue of how to lose those they already have. Weakening employment law as Osborne proposes is more likely to encourage marginal redundancy in SMEs increasing unemployment than it is a hiring spree. These moves misunderstand the incentive SMEs have for hiring – it is if they see growth possibilities in their marketplace.

Whether good or bad ideas, many of the elements of the Autumn Statement listed above are only at the consultation phase (or even earlier in the legislative process). In fact, it seems highly unlikely some of these changes would be in place to assist SMEs prior to Osborne’s forecast of a considerable economic recovery towards the end of this parliament. And yet the key problems for most SMEs are immediate – around access to finance, so some potential good here from the Autumn Statement – but also around stimulating demand so SMEs can feel confident to find and take on the right people. But, as the Work Foundation’s Director Ian Brinkley noted earlier today, there is little in this Autumn Statement that puts demand into the economy in the short term, and it is that which would really boost the confidence of SMEs to take on debt and equity to expand, and to create jobs.

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