Written evidence from the Forum of Private Business (GPP 46)

The Forum of Private Business is a proactive, not-for-profit organisation, providing comprehensive support, protection and reassurance to small businesses. We add value to businesses through the collective voice for members in local, central and European government, and the provision of tailored solutions that promote business success.

We conduct research throughout the year and our quarterly Referendum survey forms part of our regular consultation with a proportion of our members; in it we ask some key questions that help define our campaigning priorities. As such we formulate our consultation response based on reliable evidence from our members or reliable third parties.

1.                  Do you agree with the Government’s assessment of the reasons for the UK’s productivity slowdown (as outlined in the Annex to the Plan)? Has the Government acknowledged all of the main causes of the UK’s poor productivity growth?

Probably not. There are no clear answers to the productivity gap and the Forum agrees that the Government requires a robust independent review by Sir Charles Bean to assess the reasons for the productivity slowdown. We would actually go further and seek robust segmentation to understand if there is even an issue that needs to be resolved. The Forum highlights the rise of female business owners working part time around children or other dependents and a backlash against mass production that will lead to a number of niche markets where lack of productivity is perceived as a sign of quality.

As a lobbyist and support for employers with fewer than 250 staff we would like more focus on the analysis undertaken by Dellot (2015) that suggests once the higher churn rate and the non-employers are removed from their analysis there is no difference between large private sector enterprises and small employers.

The Forum would also like to see if there is any correlation between the rise of non-employers and the failure of the GVA to improve during the recession as has happened historically.

It appears that the Government has already decided that the productivity failure is down to the under-utilisation of labour and so have encouraged wage inflation.  The impact of the National Living Wage combined with pensions auto-enrolment will not give members in key industry sectors sufficient funds to invest in the short term.  This consultation and particularly the analysis of the evidence base was needed at the start of the year rather than after this policy was agreed.

The Forum feels that deregulation and giving business owners the ability to choose what technology and processes they use is the answer to this issue. It should be noted that productivity is a supply side variable and the main issue that we have seen from the recession is that more businesses are customer orientated creating support and adding value that cannot be measured in the short term, if at all. Members of the Forum see technology as a great enabler, but is must be the right sort of technology –the Government moving all services online has led to significant disruption and cost to our members over the last few years whether it is Real Time Information or MOT certification.

2.                  One pillar of the Government’s Plan is to increase "long-term investment". It outlines eight areas with specific measures to increase productivity.

a. Why has the UK’s long-term investment been so low up to now?

Investment may have been low over the last few years, but in a lot of cases it was sufficient. The Forum would be reluctant to criticise members who saved for a rainy day, rather than investing through debt-based finance on machinery or equipment when the demand was not there. However we have asked our members about increasing capacity and innovation in the past and the barriers that they have suggested are close to those in the review.

We asked our members about their plans to increase capacity in 2015. This is short term investment but as can be seen the methods of increasing capacity are similar to those in 2014 with the exception of improvement management techniques.

Figure 1. How do you plan to increase capacity in the next 12 months.

Some possible reasons for a perceived low productivity score suggestions are:

• Incorrect analysis of the statistics – VAT figures are not easily understandable and, according to members who are accountants it is common mistake to include VAT in the turnover figures on the online reporting figures, rather than excluding them.  This would make firms seem slightly less competitive but not to the extent of the gap between the UK and France, Germany or the US (around 30%)

• Lack of management expertise - businesses do not know how to get the most out of their staff or align them to the needs of the company. Convoluted employment law which may be best practice for large employers does not help managers in small businesses manage their resources effectively. Individuals fear change and innovation and can be uncooperative if the process is not managed effectively

• Reluctance to restructure their business – the consultation document highlighted the comparative lack of micro employers employing 10 or more people – anecdotal evidence from our growth panel indicated that this was due to the lack of desire from some business owners to restructure their business (in some cases for a third time) to meet what could be a temporary increase in demand.

• Lack of incentivisation in the tax system – as late as 2013 one of our members was told that R&D tax credits were only for manufacturers and those “in IT” by an accountant. It is not known whether this is from experience of HMRC – although a number of members over the years have reported that HMRC refused their applications at the last minute. Fixing Annual Investment Allowance is however a positive measure, although this was the allowance that changed seven times in its first six years and has only been fixed this year.

• Businesses still in recession or expecting to be hit by public sector contraction – a number of businesses have not recovered sufficiently to invest further or do not have the confidence to do so.  This issue may only be 6 or 7 years old and would not explain historical reluctance to invest but is still a serious issue for our members.

• Lack of predictability in terms of government policy – most recently the Growth Accelerator Programme was set up to encourage growth amongst limited companies and then in the July Budget, taxes paid out in dividends to the hard-working entrepreneurs received additional taxation. Recently flexible working and employees using their own portable devices were seen as ways of improving productivity even though such schemes are simply not suitable to many of our members.

• Lack of trust in the banking system and with lenders in general. Businesses are reluctant to borrow as it cedes control of the business to a third party.

• Lack of return on investment – particularly in terms of the workforce, the majority of external training budgets is spent on compliance or replacing internal skills rather than improving systems and encouraging automation. Lack of infrastructure investment has also meant that businesses have been less productive particularly in the case of high speed broadband which has made it hard for businesses in some areas to communicate effectively.

• Lack of appetite for risk – increasing the cost of employment and the difficulty in managing people increases risk as does accessing the right systems or equipment to improve things. Getting it wrong can cost jobs and even the business owner’s home and if a government department can get it wrong over MOT certification, what chance does a small firm have? As a result the incentive to change is becoming harder to justify and many large firms do not enter markets until a trailblazer has created a market large enough for them to show an interest in.

• Lack of access to the support needed to grow their business and invest in the right tools to make their business more productivity. Mentoring has helped but many of the mentors have limited exposure to high growth business and there is little customer-orientated support for innovation protection, personalised exporting support and even negotiation with large corporations.

• Lack of opportunity to collaborate on R&D research projects with other companies in similar industries or with similar engineering or software issues. The Catapult Centres are a great improvement but communication with universities and educational institutions is often time-consuming and a culture shock for some members.

• Lack of profits to spend on investing – businesses have been compelled to spend increasing amounts on social legislation and compliance rather than on investment.

What is apparent from the list provided above is that the UK’s productivity gap is dependent on the company that the UK is being compared against. This is why the UK needs a comprehensive analysis of the current figures in terms of international comparisons and also a reason why the Forum does not agree that the reasons for poor productivity are agreed.

b. How can we ensure that the measures relating to long-term investment in the new Plan will contribute to productivity growth?

Simplification. Better communication of complex ideas such as R&D tax credits, patent box tax incentives and other methods that incentivise growth and make longer term investment worthwhile. Making non-operational issues simple for business owners lets them focus on producing goods or services effectively and efficiently. However simplification is difficult and not something that the UK (or many other governments) have a good record on.

The most significant positive measure of this plan is to fix annual investment allowance. Quite simply, any strategic plan needs to be fixed for a significant period of time and not be countermanded in the next few years by a new policy direction.

Business support also needs to be focused on the individual need of the company rather than the one size all service that were offered to businesses in the past. In terms of cutting edge technology, allowing SMEs to enter into collaborations with larger firms is important and the Catapult Centres have been a great success in this respect.

Productivity gains within firms are important and it is worrying that the engagement agenda first started by the Macleod review in 2009 has not been encouraged in smaller firms and that the focus on “intrapreneurs” has not been considered particularly helping business owners harness commercial awareness and entrepreneurial zeal within their company without loss of control or friction between employees.

3.                The second pillar of the Government’s Plan is to encourage a "dynamic economy". It outlines seven areas with specific measures to increase productivity.

a. What are the main weaknesses of our economy, in terms of dynamism, which are supressing our productivity?

Policy makers need to think like first time innovators and entrepreneurs who work out how to make something work, start the process and then come up against the brick wall of legal issues or need to check their cash flow balance to see if they can invest in an important piece of equipment. Frustration and demotivation amongst Britain’s best entrepreneurs leads them to leave the UK, close the company or at best not allow the company to fulfil its potential.

Deregulation has been a goal of the last three governments, but by our – admittedly conservative –measures the cost of compliance is rising by around 4% a year when GDP is barely rising. Compliance is a big issue in demotivating business owners and not encouraging them to reach their own potential as is the fear of enforcement agencies that cause them to gold plate legislation and take important time away from the business.

Even international trade should be about providing the service that the business owner needs to export/import rather than sitting through a seminar or wading through general information worksheets.

The geographical issues are also well known – GVA in Anglesey is 10 times less than the equivalent in West London and rebalancing the economy is much needed, and has been since it was first suggested by the last Labour government again suggesting that there is no easy course of top-down action. Encouraging dynamism in areas where there is deprivation has been made harder by banks and councils withdrawing services that are needed to support firms looking to remain or establish themselves in these communities. Too few of the new enterprise zones fit into this context. Businesses need to see an improvement on the ground.

The high cost of property is an issue but relaxing the planning laws does not go far enough and incentives in terms of business rate reductions should be made to smaller firms that improve their locality by introducing jobs, upgrading facilities and supporting the local community.

Improvements in procurement to mitigate the natural bias of large organisations such as local authorities or public sector institutions towards larger companies by giving SMEs greater access to contracts that will improve services and provide them with a secure opportunity to invest and grow.

b. Do the measures introduced under in the plan address those weaknesses and are they appropriate?

The Forum feels that the issues in terms of productivity are more around giving businesses the resources that they need to run their business as effectively as possible. Higher wages should be the benefit of increased profitability rather than productivity, incentivising the workforce and aligning them to a common good, rather than being dictated by central Government – particularly when local authorities will be the greatest barrier to the care sector introducing these changes.

The irony is that market forces were likely to have led to an increase in the next year or so anyway. Our members place staff costs as the main reasons for the rising cost of business and there is beginning to be a worrying gap between the earnings of the self-employed which are steadily declining and those of the employee for whom the picture is more rosy. This means that a large proportion of businesses are not growing sufficiently to invest in technology to improve their productivity.

Research by the RSA shows that small employers are more likely to employ disadvantaged groups and the Forum feels that greater access to childcare is a big difference between the UK and France in terms of productivity as the UK loses a huge amount of knowledge and skills when a woman decides not to go back to work after having a child. Often by the time they return to work their skills are obsolete.

Deregulation is however the key and if the government can reduce this – which according to small firms is the biggest barrier to growth after the economic climate then productivity will improve. For the Forum the biggest concern is the number of micro businesses that do not make it to small businesses (i.e. those with 10 or so employees) and this is their main concern along with the lack of protection that they get from large corporations. Over the last year 83% of business owners have spent more time on regulation, 57% have spent more money on regulation and only 19% have seen an increase in managerial control (49% have seen a decrease), clearly this does not suggest that regulations are meeting the needs of business.

4.                Overall, does the Plan adequately address the main causes of low productivity in the UK (as discussed in question 1) and will it have the desired results?

Productivity is a failure of the supply side and the UK government is a key supplier to small firms. It is a concern that some issues are still being talked about (deregulation, the tax system, open up universities to SMEs and rebalancing the economy).

The Plan should use the apparently underused MINDSPACE techniques that they have pioneered to look at:

• What is the point of productivity improvement without also looking at demand – is the goal a pasty mountain or real ale lake? The National Living Wage in the care sector is a good example of only looking at one side of the issue.

• How do we align the needs of employees, councils, universities with the needs of the average business owner?

• How do we provide a customer-centric business support network?

• How do we simplify the taxation system so that small employers do not spend £5.8 billion on compliance and are able to police their taxes themselves?

• How government can stop dictating and start encouraging business owners to do what is best for them?

Past productivity initiatives have been focused on one stakeholder or another rather than looking at the issue in a more holistic way.

10 September 2015