My neighbours, who live above an ice cream parlour, are up in arms about their mortgages. Two of them tried to switch recently, and their lenders’ enquiries uncovered evidence that the dastardly ice cream shop was serving – horror of horrors – hot food. This was naughty; planning consent banned any cooking, which the council argued would “harm the amenity” of other residents.
So one lender has refused a loan, and another has refused to insure a property, because of the hot food issue. Insurers, who agree to pay billions for oil rig fires, take exception to little cafes with toasters. While sympathising with my irate neighbours, as a columnist I also have a duty of care to small businesses, and onerous planning laws are unhelpful to them. Councils may be protecting their private residents, but at what cost to local enterprise?
Last September the government created an economic growth implementation committee designed to lift the economy out of its longest double-dip recession since the second world war. Chaired by the chancellor, the idea is to remove the barriers thought to hinder startups, such as employment law. Planning rules too are in the sights of ministers who feel that they stifle growth and economic activity when applied too rigorously. Expect significant tweaking of planning consent legislation when the government’s promised changes go through parliament.
But so far, try as I might, there’s scant evidence of any progress by the committee. And some would argue that the government isn’t in a position to call for growth when it’s cutting its own investment faster than the private sector. In any case, the real scope for a game-changing regulation would be in the realm of finance for smaller businesses – assuming that we’re all correct in thinking that they will lead the recovery.
The liberal Centre Forum certainly thinks so; it says 59 per cent of the UK workforce is employed in the SME sector, while these firms create 76 per cent of new jobs. In a report delivered as a pre-budget Valentine to chancellor George Osborne it calls for radical tax changes to stimulate investment in SMEs. The authors want stamp duty – the “sugar” that gums up the markets, they say – abolished, to allow liquidity – the “oil” – to lubricate the engine of the market economy smoothly. The idea is that equity finance, like bank debt, should be tax-allowable so that even firms smaller than those on the AIM might consider flotation to raise capital: “Equity is quadruple taxed: upon purchase (Stamp Duty), when profits are declared (Corporation Tax), when they are paid out (Income Tax on dividends) and when the shares are finally sold (Capital Gains Tax).”
But why are smaller firms finding it hard to borrow from banks? Most of the Bank of England’s £80bn Funding for Lending Scheme is currently going to homebuyers rather than businesses. Perhaps in despair, its deputy governor last week suggested charging negative interest rates to high street banks for holding cash in Threadneedle Street, in the hope that they would lend it to small firms. But aren’t interest rates already negative in real terms after inflation? The deputy governor even raised the spectre of large corporations, awash with cash, lending some of it to smaller firms.
John Walker chairs the Federation of Small Businesses. With four out of ten small businesses rejected by lenders, he says challenger banks are needed to improve lending competition. “Many new banks coming into the market will only lend to small firms so they can use this funding to attract new customers and become larger. The fact that lending has fallen shows just how important it is for the government to use the Business Bank and the Financial Conduct Authority to create more competition in the sector, through non-bank finance routes as well as traditional banks.”
As for the stamp duty abolition idea, the FSB said their members were too small to be that interested, which kind of proves Centre Forum’s point that they need to be thinking differently. All the same, 80 per cent of them were looking for as much as £100,000, which might be of interest to a micro-brokerage, if the chancellor offered the necessary incentives.
Here’s the FSB’s wish list for “Gideon” Osborne’s briefcase on Budget Day:
- Details of the promised Bank of Business;
- A single source of investment advice and support;
- Non-audit cash based accounts acceptable;
- Rates relief;
- Extension of the National Insurance Contributions holiday;
- Cancellation of fuel duty rise; and
- Extend StartUp Loans scheme.
Like most business folk, as the beneficiaries of these mooted tax/benefit bungs, they didn’t suggest where the spending cuts should be applied to pay for them. Hospitals? Army battalions? It’s never clear, is it. One could also ask why small businesses should get public money to help them carry out normal commercial activity such as searching for loans. (And while I’m on my high horse, why do people sneer at those on benefits, while businesses getting tax benefits and job creation schemes never attract negative comments, even when they sometimes go bust.)
Surely the point about all this is that the market doth not always provide? Banks don’t want to lend to small risky firms when everyone is annoyed with them for selling the farm and lending to people with shaky finances and vulnerable jobs. The government, as Vince Cable admitted on the BBC, is asking banks to pull in two directions; to build up their capital base, decimated in the aforesaid silliness with the shaky finances; and lend to the wee-to-mid-sized firms that everyone agrees are the key to economic recovery, what with their naïve enthusiasm and tendency to employ folk to do things. And if councils drop draconian rules like banning cooking, and insurers stop worrying about cafe kitchens and put more pressure on oil companies to be more careful, maybe the world will be a better place after Budget Day. Go for it Gideon!
Bruce Whitehead‘s column on Real Business explores the latest political developments and their effects on UK businesses.