Small and medium-sized enterprises (SMEs) account for 99.9 per cent of all firms, with 16.6 million employees, and contribute over half of private sector turnover.
Last week in the spring statement, the chancellor provided some help. She reiterated the government’s aim for SMEs to benefit from increased defence spending. This follows the launch of a support hub to help firms access supply chain opportunities. It continues the aim of recent years to ensure that procurement policy helps SMEs.
While welcome, this is not enough. As highlighted by the Federation of Small Businesses (FSB), too often the potential of SMEs “is constrained by access to finance, regulatory burdens and economic uncertainty”.
The costs of policy are hitting them too. That will be compounded this week by a rise in employers’ national insurance and a reduction in discounts to business rates, plus the impact of a higher national minimum wage. The latter will add to payroll costs, trigger wage compression and force many firms to raise other wages. All these measures could lead to job cuts, along with the future Employment Rights Bill hitting competitiveness.
SMEs are vital for the public finances, too. Last week the Office for Budget Responsibility noted “the largest downward revision to receipts between an autumn and spring forecast since 2012”. A large part of that was due to small firms, as higher inflation and interest rates reduced their profits.
An important lesson is for the chancellor to avoid further damaging taxes, plus the need for greater scrutiny of policy proposals and awareness of their business impact on SMEs. Any repeat of the uncertainty seen last autumn could dent SME confidence in the run-up to this year’s budget. The FSB’s small business index, a quarterly survey that measures the confidence and outlook of small businesses in the UK, fell to -64.5 in the last quarter of 2024, its lowest level for over four years.
Many small firms also face skills gaps, plus economic uncertainty from the green and digital transitions. All firms would benefit from policy predictability. SMEs would also gain from a simplification of the tax and regulatory environment, as compliance costs disproportionately affect them.
There needs to be a proactive policy approach to SMEs, not to micromanage them but to address their issues. This is important not only in itself but also to confront low productivity and regional inequalities.
The acronym FEED best captures what’s needed to address the regional divide. F is for finance to play its part. E is to empower local decision makers. E is also for enterprise, as the private sector is critical to success. D is for diffusion, as the economic divergence within regions is greater than between them.
Such diffusion reflects the long tail of small firms with low productivity. So making inroads into the issues facing SMEs will help both productivity and regional growth.
It’s not just a matter for Westminster; the City also has a critical role. Access to finance remains a persistent problem. Many SMEs struggle to secure funding from banks, who favour larger, lower-risk firms. Just before the pandemic, the Bank of England acknowledged that the funding gap faced by SMEs was a mammoth £22 billion. This is an age-old problem.
More recently, the lack of patient capital and absence of financing to allow SMEs to scale up and invest has attracted more attention, but solutions are lacking. The City needs to do more to back UK start-ups, although the British Business Bank is trying to help bridge this divide.
SMEs are the backbone of the economy. It is essential for economic success that we address the challenges that hinder their ability to grow and compete.
Dr Gerard Lyons is chief economic strategist at Netwealth
