Small and Medium-sized Enterprises: Government Policy

Lord Haskel Excerpts

Thursday 17th June 2010 Lords Chamber

[Lord Haskel]

My Lords, I congratulate my noble friend on his excellent speech in moving this Motion. For my part, I want to start first with a conundrum for the Minister. What do the following have in common: clothing with sensors that monitor and transmit data about people with long-term health conditions, so that they spend more time at home and less in hospital; an oral fluid that enables the police to detect the increasing number of drivers who are under the influence of drugs—previously they had to do this by observation; and a technology that will make our mobile phones more secure as they become a source of replacing cash in our wallets? The answer is that all three are Small Business Research Initiative programmes.

How does it work? A government department identifies a need for a product or service. Through the Technology Strategy Board, this is framed in the form of a competition. Small businesses enter and the winners gain a contract to develop and supply the product or service. Since 2009, more than 400 contracts have been awarded to mainly small businesses by 13 government organisations. As my noble friend Lord Sugar indicated, everybody benefits. Government departments procure new technologies faster and with managed risk. Small companies get paid contracts at the critical stage of product development. Some of the financing gap left by the banks gets filled.

This illustrates the reality of the relationship between government and small businesses, but there is also a lot of myth about this relationship. Sadly, the coalition agreement is strong on the myth and weak on the reality, so let me try to separate them out. Before I do, let me remind noble Lords why there should be a relationship between the Government and small businesses. As many fund managers will tell you, the reason is that many of our large companies have their best years behind them. They have experienced most of their growth and innovation and, unless they change, somebody else—leaner, fitter, more hungry, more innovative—will take their place and outperform them. The Government must encourage this to happen here instead of elsewhere.

It is a pity that we are not hearing from more noble Lords opposite—but that is the problem of having this debate during Ascot week. If they were here, they would say that the way in which to encourage small companies is to cut red tape and to have low rates of tax. This is where we have to separate the myth from the reality.

Let me start with the red tape. When the noble Lord, Lord Heseltine, became Secretary of State for Business, he promised us a bonfire of red tape. It did not happen because of lack of fuel. When Margaret Beckett became Secretary of State—I had the honour of serving in her team—we, too, tried to cut red tape. We started a website where people could tell us where the problems lay—anonymously, if necessary. As a result, we simplified the auditing and the VAT regulations for small companies, but the effect was not great. We asked a lot of businesspeople to be specific, but they said that the problem was a lot of small things hard to specify. I am convinced that a myth has grown up around the whole question of red tape and I urge the Minister not to let the myth distract her from the reality.

What is the reality? It is that the myth has held back all Governments from dealing with market failure and lack of competition by regulation. Look no further than the banks. Instead of regulating from the perspective of the customer—of the wider community—the regulation was captured by the industry. Let me give another example. I notice that once again the FSA is—or was—investigating the closed shop that controls initial public offerings in London, an important source of development finance for small companies. This unregulated market failure has been going on for years. The high charges certainly deterred me 30 years ago and it must have been the same for hundreds—perhaps thousands—of others. It is an example not of too much red tape but of too little.

The other area where myth and reality become confused is taxation on small companies. My noble friend Lord Sugar spoke of this. We are told that, if the Government raise capital gains tax, diminishing returns will set in and entrepreneurs will leave the country. The myth surrounding this relates to the so-called Laffer curve—tax rates on one axis and government income on the other. I am sure that the curve exists, but the trouble is that no one knows where it peaks. Economists cannot tell us because of the many external factors, as mentioned by my noble friend Lord Sugar. Actual tax rates have been as low as 18 per cent and as high as 90 per cent. The answer of course lies somewhere in between, but your guess is as good as mine. So do not let this myth distract you from the reality.

The reality is that small companies need help in their early stages when they are struggling to establish themselves. That is why at present they benefit from lower business rates, lower tax on profits and increased investment allowances. I ask the Government whether this will continue. In reality, tax breaks are needed earlier rather than later when a business has been successful and the investors are collecting their profits. Higher tax may encourage them to leave the money in the business long term, which is an objective in the coalition agreement. I agree with my noble friend Lord Sugar that there should be arrangements for those who invest long term.

What other realistic ways are there for the Government to encourage small companies? Europe provides opportunities. I find Mario Monti’s paper on the completion of the single market very convincing. The single market may provide more competition, but it will also provide more opportunities for our small companies—the kind of opportunities from which our economy will benefit. The Government are keen on a green economy. Raising the target to cut carbon emissions from 20 per cent to 30 per cent by 2020 will help small companies. It will encourage them to engineer new green technologies. We already have a Technology Strategy Board which can champion this.

Let me end with another conundrum for the Minister. What do the following have in common: an ozone laundry system, which is becoming the European standard to prevent MRSA and Clostridium difficile; a new carbon composite produced at lower cost and with a lower carbon footprint, which is currently being used on the brakes of a winning F1 car and being tested on aircraft and trains; and a shock-absorbing polymer, which is used not only by the MoD but in the shoes of ballet dancers all over the world to protect their toes? The answer is that all these are new technologies developed in Britain, which, through the Materials Knowledge Transfer Network, have been transferred to small companies, thus helping them to grow.

I think that my conundrums have demonstrated that under a Labour Government small companies flourished. Will this support continue? If so, I hope that the Government will stop pronouncing Britain bankrupt and start showing confidence and pride in the small firms that are our future.