Economic Prosperity and Employment

Baroness Kramer Excerpts

Thursday 18th July 2013 Lords Chamber

[Baroness Kramer]

My Lords, I join in the thanks to the noble Lord, Lord Haskel, for this important debate. Since I have only a few minutes, I am going to follow in the footsteps of the noble Lord, Lord Cope, and focus on small businesses. I think we are all aware that job growth is no longer going to come primarily from large companies opening large factories. Those days are over. Small businesses provide more than half our jobs. Many do not realise that they provide more than half our exports. Some will have heard of the rule of one in three. If one in three small businesses added one additional employee, this would wipe out unemployment. That is pretty much true across the developed world.

All government policy has been very slow to recognise the need to row in behind and provide the necessary support for small businesses. I am incredibly conscious that there is a wide range of programmes, such as EIS and other tax incentives to invest in small businesses, and the removal of stamp duty from AIM so that small businesses can raise public shares. UKTI also has very effective programmes now to provide support for exports, and the Government are reshaping export finance programmes so that they suit small businesses. But most small businesses do not have a clue about what is going on and what is out there and available to them as support.

I want the Government to look at the whole communication channel to this complex world of small businesses. It is certainly worth looking at the German approach, which tells every business that it needs to become a member of its local chamber of commerce—I do not care whether they pay only 50p to do so—so that they are in the system and contact can be made, communication can happen, education can flow through, and exchanges and networks can be built. We have to get serious about communication. If it is done through the structures of LEPs, that is fine with me, but we have to start making sure that there is an effective mechanism to reach out to that wide net of small businesses.

When I ask small businesses what is constraining their growth, the answer is always skills—I suspect that other noble Lords who are better equipped on this subject will talk later—but it still astonishes me that we manage to develop a highly sophisticated educational system at school and university level that delivers people often with extensive qualifications that simply do not match the job demand that is out there. Again, with a mechanism of more locally driven decision-making, local networks can try to counter that, but this surely has to go to the top of any agenda that we deal with.

In the three minutes that remain to me, I would like to focus on funding for small businesses. The major banks have long said that they finance anything—a small business, a large business, whatever else—that is bankable, but to those of us who have talked to so many small business and with various trade bodies it is evident that this is not true. I think that banks are finally facing up to that reality. They give us two reasons. I am interested less in their reasons and more in the actuality. One reason is that to work with really small businesses, highly knowledgeable people with exceptional capabilities are needed, because it is so granular when you work with a small business. The skills that have to be mastered are way too costly, given the structure of our banks. It is just not possible, given the way in which we organise ourselves and where we want our priorities to be.

The second issue is capital requirements. Banks have to be properly capitalised. We cannot give on capital requirements in a general way. Banks tell us that this is highly risky stuff, and that they are required to hold large amounts of capital, which essentially makes it uneconomic for them to offer credit on reasonable terms.

How have other countries that face exactly these problems dealt with them, and what can we learn from them? As I have only a short time, I shall look at the US example only. The US Government made a commitment a long time ago to what they call “the last mile”. How do you get money out to the small people in a community, much as we have the Post Office deliver a letter the last mile? The US Government decided that major US banks were not capable of that activity. You have to set up a different sector to deliver that, and because making sure that that happens is a public good, the US has been willing, through its Community Development Financial Institutions Fund, which sits in Treasury, to put substantial amounts of money into making sure that a sector exists that can deliver that. The US funds it by billions. As partners in that effort, it has drawn in its big banks. It has done it largely through a stick, the Community Reinvestment Act, which most noble Lords will be familiar with, so I shall not go into the details.

The effect of being required to put money into these entities and to provide them with knowledge, support and expertise is that it now seems normal to US banks. I have been talking to those here. They find it astonishing that it is a reflex action of our major banks to say, “This is an area we are not going to serve. It is not right for us”. It is exciting to be able to get in there with relatively small amounts of money and do it. I ask the Government to look at those opportunities.