By Nina Skero, Head of Macroeconomics at the Centre for Economics and Business Research
A new index produced by FSB and the Centre for Economics and Business Research tracks the impact of Government policy on SMEs. The results stress just how much the burden has increased.
The UK economy finds itself in uncharted waters. Six months after the triggering of Article 50, and more than a year after the Brexit referendum, key questions on the country’s future outside the EU still loom large.
The country is also in the midst of fundamental economic shifts. For the past two decades, UK growth has been heavily dependent on consumer spending. In 2016, it accounted for 66 per cent of GDP.
However, 2017 has brought about a fresh squeeze on household budgets. With wage growth continuing to stagnate, many workers are seeing their real (inflation-adjusted) incomes fall.
Naturally, households have responded by tightening the purse strings, thereby putting pressure on economic growth and consumer-facing businesses.
This sentiment is reflected in the latest edition of FSB’s Voice of Small Business Index, which stands at 1.1. Excluding the post-Brexit dip to -2.9 in Q3 2016, this is the lowest the index has been since late 2012.
The index is actually in negative territory for businesses in the wholesale/retail and the accommodation/food services sectors.
The slow domestic economy is one barrier to small firms’ growth. Another, of increasing concern, is the tax burden. In Q3 2017, one in six small firms identified its tax burden as an obstacle to growth. A year earlier, only one in seven did.
In an effort to understand the tax burden that small firms face and, more broadly, all the costs that businesses encounter as a result of Government policies, FSB and the Centre for Economics and Business Research have compiled the Impact of Government Policy Index. The index takes into account factors such as taxation changes, relief adjustments and the National Living Wage.
In order to make the findings as relevant as possible to every sole trader, micro, small and medium-sized enterprise, the index is broken down by business size and industry, and currently covers the 2011-2016 time frame.
Looking at the headline rate, one sees that costs for small firms have risen consistently since 2011 with the exception of a temporary dip in 2015. In 2016, the average UK small firm faced business costs 13 per cent higher than in 2011.
A rising minimum wage, pension auto-enrolment and a decline in the annual investment allowance all contributed to the rise.
Wholesale and retail trade emerges as the only sector for which costs were lower in 2016 than in 2011. On the other hand, the construction sector has seen the strongest increases, with average costs 34 per cent higher in 2016 than five years before. The Impact of Government Policy Index highlights that, in addition to uncertainty and the growth slowdown, small firms are coming under pressure from a range of Government-imposed costs.
In terms of the UK’s economic outlook, the times they are a-changin’. As well as new challenges, these changes also offer new opportunities. With small firms well placed to take advantage, it is essential for the Government not to overburden them with costs, but work alongside the small business community to drive the changes that the index highlights are needed.