Rare opportunity to focus on reducing public sector waste

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ePolitix.com speaks to Phil McCabe of the Forum of Private Business about the Comprehensive Spending Review (CSR) and what it means to small businesses.

What is the key thing that small businesses want to see from the Comprehensive Spending Review (CSR)?

Entrepreneurs want to be able to start and grow businesses, and the government says it wants small business growth to be at the heart of its plan to create a private sector-led economic recovery.

There will inevitably be a lot of pain as a result of the spending cuts but, faced with a difficult set of decisions, it is right that the government is focusing on public sector efficiency to tackle the deficit rather than substantially increasing the burden of business taxes.

The latter move would be the unsustainable option. In fact, along with removing other cost barriers such as red tape, small firms should be taken out of taxation as much as possible so that private sector growth – job creation – is able to fill the recruitment gap created by cuts in the public sector.

Where would you like to see support for small firms focused?

Streamlining tax administration and other legislative procedures would help to pay off the deficit and simultaneously stimulate business growth. But it is unlikely that these efficiency measures will be enough, even when combined with the tax cuts that have already been announced.

In conjunction with the government's efficiency drive we need more radical measures to remove tax and legislative barriers in order to empower employers, helping businesses to grow and create jobs to take people out of welfare; measures such as extending the national insurance holiday to existing non-employers as well as new start-ups.

In other areas, such as public procurement and public sector payment, the administration of individual projects should be streamlined wherever possible, with the National Audit Office given the option to demand greater transparency. Above all, the successful procurement of public contracts should be rooted in the ability of a company to carry out the work and provide value for money rather than other, less relevant criteria.

No government department should be exempt from an efficiency review probing the procurement process and payment issues right along the supply chain – it goes beyond the relationship between a public body and a main supplier.

Currently small firms are owed a staggering £24bn in outstanding payments. Addressing the immediate problems in the public sector should be a priority in the CSR.

Longer term, the government must work to strengthen the Prompt Payment Code and, in the construction industry, the Fair Payment Code. One option would be to consider using only signatories of the former scheme for larger public sector contracts – particularly construction projects – and examine instances of supply chain injustice on an anonymous basis, as far as possible.

In rebalancing the economy by helping firms to better access potentially lucrative export markets, the government should preserve export support by ring-fencing spending on UK Trade and Investment (UKTI) and increasing the financial protection available from the Export Credit Guarantee Department (ECGD).

On employment, along with reducing the burden of complying with employment legislation to encourage job creation, the Forum is urging the government to support workforce flexibility by addressing the cost of transport, which is currently prohibitive for lower-paid workers, and by streamlining the redundancy process so that businesses in distress can act quickly in order to minimise job losses.

The Forum is calling for skills funding to be protected, for example via annual investment allowances, and to focus on real training needs. State-subsidised training for firms with over 250 employees should also be limited to more sustainable apprenticeship schemes, as well as work to encourage universities to open their doors to commerce and the commercialisation of research.

In its submission to the CSR, the Forum has called for entrepreneurship programmes within schools to be more focused on skills and employability, and wants incentives for colleges to engage directly with business owners.

We also need incentives to encourage internal training and supply chain training aligned more closely with industry-specific business support.

We know that regional development agencies (RDAs) and local Business Links are being cut. The national Business Link website remains but it should be more streamlined and supported by a call centre (about 11 per cent of business owners do not have access to the internet, according to EU research). As always, it is important that business support services provided by the private sector are not duplicated.

We need more certainty over how the new Local Enterprise Partnerships (LEPs) will operate to address changing business needs, and more clarity as to what public funding will be available to them following the cuts. If they are given the freedom to find funding from private financiers, the Forum believes that the local bodies should be allowed to borrow against less volatile council rates rather than business rates.

On the subject of finance, the Forum believes that banks, not taxpayers, should bear the cost of putting in place monitoring processes and transparency over access to and cost of finance, rejection rates and demand. It is important that any bank levy does not undermine the competitiveness of the UK's financial sector or result in small business lending costs increasing unsustainably.

The government's Enterprise Finance Guarantee (EFG) should be made more flexible and targeted on growth finance. Better provisions should be made for alternative forms of finance to enter the market. Equity funds, part financed by the public sector, should be more flexible in terms of their targeted sectors.

To promote inward investment, foreign direct investment should be sought at a national rather than local level, limiting the likelihood of a 'Dutch auction' between regions. In addition, we need better information and guidance on collaborative research schemes for small businesses and research, and development tax credits replaced by greater annual investment allowances.

On a local level, there should be a wealth-retention index encouraging councils to ensure wealth stays within communities; a best practice system on business crime-prevention in areas where this will have most impact; and long-term incentives for councils that help support and develop local businesses.

Overall, the government should seek to truly engage local businesses in the 'Big Society', and that will mean improving communications technologies, particularly broadband access, across the country.

What are your recommendations for reducing the government deficit and encouraging economic growth?

The Forum believes that the CSR is a rare opportunity for the government to focus on reducing public sector waste and, at the same time, stimulate small business and economic growth.

Simplifying the process of complying with regulation – the government has already unveiled a 'one in, one out' regulatory system, which will be fine if the incoming red tape proves to be less burdensome than the outgoing legislation – and streamlining the UK's complex tax system would help free up entrepreneurship and go some way towards reducing the budget deficit, providing these measures foster job growth and actually reduce the tax and annual £12bn red tape burden faced by small firms.

But, going forward, the handful of tax measures and imminent spending efficiencies should be bolstered by a much bolder tax regime that facilitates small business growth rather than one that favours large companies.

Much of the tax burden is disproportionate, so another measure should be to ensure HMRC is able to close the tax loopholes exploited by large companies that create an uneven playing field –such as the Low Value Consignment Relief on VAT for goods imported through the Channel Islands.

The government must also agree to review supplementary business rates and ensure that other potential local taxes – such as workplace parking levies – are reviewed to deter parochialism and introduced only with support of the local business community.

Further, the Forum wants policies that support the construction industry and the low-carbon economy by reducing VAT on businesses seeking to install energy-efficient or energy-creation systems and by creating a green investment bank to financially support this transition, reducing the number of inefficient 'green' quangos and support services in the process.

How have small firms been affected by the public sector cuts so far?

There have been some discernible physical effects. In the construction industry, for example, there is evidence that public contracts are less forthcoming. Some larger contracts for consultants to the public sector now require central government approval, and some existing arrangements are likely not to have been renewed.

However, many small businesses carrying out public sector work have yet to feel the full impact of the cuts – that will happen over the coming year. Hopefully, for private sector organisations, the impact will be less severe than many fear. There are likely to be opportunities for smaller companies that are able to react quickly to a changing market where public bodies experience cuts.

Uncertainty and lack of clarity over where the cuts will hit has had an effect on businesses confidence. Our latest 'Economy watch' member panel survey shows that confidence is higher among businesses that are less reliant on public sector contracts.