By Sam Bowman
Although the media prefers to focus on gaffes like 'pleb-gate' and George Osborne's 'great train snobbery', the big story about the coalition should really be its failure to cut taxes and regulations for small businesses.
Small and medium enterprises (SMEs) make up 99% of all businesses in Britain and account for 59% of private sector employment and 48% of turnover. They are critically important to economic growth, but are struggling under a heavy burden of taxes and regulations.
In a new Adam Smith Institute report today, Unburdening Enterprise, we identify some of the most important steps that the government should take immediately to reduce the burden of the state on SMEs and, in doing so, stimulate employment and economic growth.
By far the biggest obstacle identified by SMEs in industry surveys is the employers' share of National Insurance contributions (NICs). According to a survey by the Federation of Small Businesses, 44% of SMEs would take on at least one more staff member if the government cut employers' NICs; another survey suggested that 60% of SMEs would do so.
A conservative estimate based on these surveys suggests that scrapping employers' NICs for SMEs would create 500,000 new jobs at an immediate cost of £25 billion a year. However, this cost would be offset by savings from the welfare budget, tax receipts from newly-employed workers, and the knock-on economic boost from such a significant increase in production.
The costs of complying with government regulation – including hiring accountants, lawyers and other expensive professionals – are the second-biggest cost identified by SMEs, and one that puts them at severe disadvantage compared with big businesses.
Compliance costs are relatively fixed for businesses, so large, established firms can afford to handle regulations that smaller ones cannot. This can act as a significant barrier to entry for new firms. The government should exempt SMEs from all new regulations, including all scheduled national minimum wage increases, pensions reforms, paternity leave extensions, the equality bill and the immigration cap.
To by-pass many existing employment regulations, the government should encourage and facilitate the registration of many SME employees as self-employed under contract. This will allow firms to take on new workers at lower cost without forcing the government into a politically difficult battle to reform employment law.
Provisions for "youth contracts" should be made, allowing firms to take on under-25s without adhering to employment regulations that currently price them out of the market, such as the national minimum wage. These youth contracts would allow young people to get a foot on the employment ladder and directly target the country's youth unemployment problem, which currently stands at 20%.
The government's deficit reduction plan is based on growth projections that will not come about without radical deregulation of business. Unburdening Enterprise identifies the deregulations that SMEs need, with special focus on reducing unemployment. We need a jobs-led recovery, and that will only come about if government gives businesses the space they need to operate and grow.
By Sam Bowman, policy director at the Adam Smith institute, follow him on Twitter.
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