Small firms, giant leaps, and the elephant in the room

IPPR has recently released a detailed and thought-provoking report. In Small Firms, Giant Leaps, Spencer Thompson considers the contribution small and medium-sized enterprises (SMEs) have made to Britain’s economic recovery since the financial crisis and the role they could play over the coming years – specifically in getting more people back into work. Small Firms, Giant Leaps suggests some sensible reforms that this Government should take seriously, but it falls short of dealing with the real problem; a problem so much discussed and so obvious that its mere mention is liable to induce a collective yawn: too much complex regulation.

As the report makes clear, SMEs have contributed enormously to the labour market recovery since the financial crisis – 84% of jobs growth between the start of 2010 and the start of 2013 came from SMEs: “Overall employment rose by 1.5 million between the start of 2010 and the start of 2013. Of this, 1.2 million was in enterprises with 0–249 employees. Given that they only account for two-thirds of total employment, it is clear that SMEs are disproportionately driving the jobs recovery.”

The report suggests four policies for using SMEs to the end of creating “full employment” (defined as 80% of the workforce). I’ll first consider two through four.

The second recommendation is to retain and reform statutory sick pay recovery. Obviously, businesses are less likely to hire workers who have a higher risk of getting sick and not turning up to work, and this is more weighty burden for smaller businesses. Thompson suggests targeting current support towards individuals that face the greatest sickness-related hiring risks and only making this available to small firms (those with an annual NICs liability of less than £45,000). It is estimated that this reform would cost just over £20 million, which is good deal less than the £50 million currently spent on statutory sick pay recovery.

The third recommendation is to intermediate labour markets in welfare-to-work policy: “Providers under the next iteration of the Work Programme should be allowed and encouraged to act as a temporary employment agency for claimants in particular groups, securing short-term paid work placements with employers.” The fourth recommendation is for an occupational benefit insurance scheme for SMEs. Thompson calls on employer associations – such as the Federation of Small Businesses and the British Chambers of Commerce – to work with insurers to help SMEs club together to offer occupational sick, maternity and paternity pay to their employees.

The first recommendation is less convincing and gets us to the nub of the problem. Thompson calls for more business support for new employers and existing micro and small businesses. The problem is easily identified: “those not large enough to employ a dedicated HR professional and unable to afford the cost of external support have to navigate through an often complex system of employment law and labour market regulation.” The solution, according to Thompson, is to give up to £1,000 in support and services.

Rather than setting up yet another scheme to navigate the complex regulation, the Government should exempt small businesses from as much of the labyrinthine system of employment law and labour market regulations as is feasible. Since 2001, the Government has been committed to exempting microbusiness from upcoming “burdensome” new regulations. The logical conclusion is to exempt them from existing burdens too. For those who suggest that this can’t be done, just consider that in 2012 the Government exempted hundreds of thousands of low-risk workplaces from health and safety inspections.

Information is certainly important for SMEs – the chopping of Business Link and the various changes since then must have done significant harm – but by their own reckoning regulation is the key reason SMEs aren’t hiring more. As is shown in the Figure 2.1 (page 33) of the report (see below), when asked in an FSB poll about the barriers to taking on more staff, only 5% of SMEs said it was “not finding the appropriate information”, while 32% said it was a “fear of litigation/employment tribunals”, 30% “employment law/regulations”, 16% “other regulations”, and 14% “administrative burden”.

FSB chart

Some may suggest that SMEs fears are unfounded, but the 321,800 claims accepted by employment tribunals in 2011/12 suggest that the hesitancy is based on real and present dangers. One of the costs of regulations designed to protect the currently employed is that it restrict access to those on the margins of labour markets. If your goal is 80% employment, then, whether you like it or not, deregulation is the most powerful weapon in your armoury.

Philip Salter is Director of The Entreprenuers Network.

Why David Blanchflower is wrong

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On Bloomberg.com former MPC member David Blanchflower argues that the ‘Conservative austerity idea is failing‘. The former external member of the Bank of England’s Monetary and Policy Committee (MPC) suggests that the coalition government is driving the economy into another recession. Yet despite the confidence with which he asserts his prediction, Mr Blanchflower does not have a crystal ball. Of course, we might indeed experience two successive quarters of negative growth, but likely not for the reason put forward in this article.

Despite his academic credentials, Mr Blanchflower is a political beast – and his analysis reads as such. His thesis is built upon his belief that tax cuts – or even the thought of tax cuts – will cause a double-dip. But Keynesian obfuscation on the animal spirits doesn’t really get us anywhere. As much as the coalition government’s rhetoric and policy proposals of tax rises and cuts might be worrying consumers and businesses, the previous government’s head-in-the-sand deficit denial was also causing uneasiness. Let’s not forget that the hawks were circling around UK government debt. When politicians have brought your country to the point of bankruptcy and central bankers are ignoring the inflation eating away at your wealth, lacking confidence is a pretty natural reaction.

So rather than coming in on the side of whether the disease or the medicine leads to the greater loss of confidence, better to focus on what works. Luckily, Alberto Alesina and Silvia Ardagna of Harvard University have done the hard work. In a 2009 paper entitled ‘Large changes in fiscal policy: taxes versus spending’ they conclude that:

Fiscal stimuli based upon tax cuts are more likely to increase growth than those based upon spending increases. As for fiscal adjustments those based upon spending cuts and no tax increases are more likely to reduce deficits and debt over GDP ratios than those based upon tax increases. In addition, adjustments on the spending side rather than on the tax side are less likely to create recessions.

The paper is worth reading in full as it is comprehensive in scope, has a simple and convincing methodology, and comes to the unequivocal conclusion that tax cuts trump spending. Confidence is a tricky policy lever to pull, one based on facts tends to be much more successful.

No longer the anti-business Secretary?

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cableProposals to reform business tribunals have been put forward today by Vince Cable. If passed, these changes will certainly be a step in the right direction, but not enough to ensure that the private sector is free to lead the economic recovery, which is vital to shake off the mammoth national debt and overcome the structural deficit.

The proposals include an extension of the qualifying period for unfair dismissals from one to two years, fees for bringing a claim to lessen vexatious litigation, and the creation of a compulsory mediation stage with the Advisory, Conciliation and Arbitration Service (Acas) to screen out unnecessary cases.

Although never pleasant for the person being laid off, easing regulations allowing companies to sack their workers with greater ease, will lead to better outcomes. This is to allow the “churn” of employment vital to modern dynamic economy. Sir Richard Lambert, the former CBI Director-General, defended the “churn” in his final speech earlier this week: “in the past 12 months, there have been over 600,000 lay-offs – and yet aggregate employment has risen by around 250,000.” Quite right. If the government is going to take an interest in employment matters, it shouldn’t be concerned with the number of people losing their jobs, but with the aggregate. And the best way to get the government can get this churn is through low taxes and deregulation.

Yet the Business Secretary is still just tinkering at the edges when what we need is need a bonfire of bureaucracy. Sir Richard Lambert’s in the aforementioned speech he suggests a few places to start. I would add his extensive list the need to scrap the minimum wage or at least get freeze it while the Low Pay Commission (LPC) marching orders.

In the medium to long term though, this government or the next must get a handle on the regulations imposed by the terms of our membership of European Union. If this country is not to be dragged in to Europe’s stagnant condition, a government will need to renegotiate our membership so that it precludes the European Commission’s and the European Court of Justice’s involvement in employment and social policy and law. Without this, there is little that any Business Secretary can do.

What’s wrong with liberty?

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Is there any trouble with liberty? According to Christopher Beam there is. In New York magazine he has a decent crack at the philosophical nut of libertarianism, but comes up well short. The question the article asks is “do we want to live in their world?” ‘Their’ being libertarians. His answer is not only that we don’t, but that we are not likely to. He might be right on both counts, but not for the reasons expressed.

The meat of his argument appears to be that libertarianism takes things too far, but his understanding of the scholarship is weak. Bucketfuls of libertarian ink have been spilled on monetary reform, but in a paragraph devoted to this subject, he mentions only a gold standard. His conclusion is that this is “a policy that most economists agree would lead to economic meltdown”. Firstly, a return to a gold standard is not the only game in town, but more importantly since when was it a good idea to listen to most economists?

For Mr Beam, “There’s always tension between freedom and fairness. We want less government regulation, but not when it means firms can hire cheap child labor.” This is a false dichotomy, and not only because fairness is a completely subjective term. It is the fruits of capitalism that have allowed the postponement of work to become a norm for the children of the developed world. While in the developing world, prohibiting children from working often forces them into criminality and prostitution. Most people working on the ground know this and work around it accordingly.

A central criticism Mr Beam throws at libertarians is they need to bend their principles. In fact, libertarians have been working at the dirty coalface of politics and policy for years, inventing and promoting incrementalist policies that often don’t adhere to the full picture of their personal ideals. It is indeed a tough balance between principal and political power, but libertarians have never been afraid to trade in a little bit of the former for the latter. Perhaps, on occasion too much. But to suggest that the movement has been snooty towards politics is just plain wrong. The two most recognisable figures in the libertarian pantheon,  Hayek and Friedman, were not afraid to get their hands dirty when the need arose.

Mr Beam is not entirely uninformed about the key figures and pressures in the libertarian movement. However, he is remarkably ignorant of the ideas and policy successes. To be fair, anyone would find it hard to satisfactorily bring down a political philosophy in a couple of thousand words, especially one that is mostly right.

A balanced education

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According to Sir Paul Ennals, chief executive of the National Children’s Bureau, England’s education system is in danger of making pupils unhappy by pursuing exam success at all costs. His gripe is with the potential of certain schemes, such as school breakfast clubs and initiatives to make school meals healthier, being dropped as part of the package of cuts to public spending.

His criticism does make sense. If school budgets are cut, there will be less room around the edges to do the warm and fluffy things that could indeed making students happier. However, Sir Paul Ennals’ conclusion is largely inadequate. Rather than calling on government not to cut various schemes, this issue has to be seen in the larger perspectives of deficit and reform.

All sectors of public sector activity need to be cut. Although some items of spending have better claims to being saved than others (arts vs. cancer sufferers is a no-brainer), there should be no sacred cows. Education has areas in which savings can be made. In tough times most parents prioritise reading and counting over breakfast clubs and healthy meals.

Beyond the unpleasantness of cuts, reforms should continue to be the focus of Gove and all that he surveys. To put it bluntly, state schools need to function as any service industry, responding to the will of its customers. In the case of schooling, the customers are the parents. Despite the extension of academies and the hesitant free schools agenda, their local supermarket is still more accountable than their local state school.

The more government steps back from education, the more room there will be for the side orders that lead to a more balanced education. This could be along the lines of Anthony Seldon’s happiness philosophy or something else entirely. On the whole Independent schools manage to have a more balanced approach to educating children than state schools, so there is no reason why a voucher-based deregulated state system couldn’t compete, if that’s what parents want.