Queen's Speech — Debate (3rd Day)

Part of the debate – in the House of Lords at 8:10 pm on 8th December 2008.

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Photo of The Earl of Courtown The Earl of Courtown Conservative 8:10 pm, 8th December 2008

My Lords, I do not pretend to be any expert on the economy, like the noble Lord, Lord Barnett, whose wise words we have just heard, nor can I claim to understand in any great depth the best course for macroeconomic policy. What I can tell noble Lords is that I understand the problems facing SMEs, such as that of ensuring that there is enough money in the bank account to pay suppliers and to put wages in the packets of the workers at the end of the week.

The noble Lord the Secretary of State ably described the situation facing the economy; it is not worth repeating or getting even more depressed about than we already are. So where are we at the moment? In a recent debate, I highlighted the plight of small and medium-sized enterprises. A steep decrease in consumer confidence and tough economic conditions have continued to push margins. SMEs are facing a drop in business, difficulties obtaining credit and the consequent insufficient liquidity to meet their financial obligations. That puts many in danger of following the vicious cycle through to bankruptcy. This is of serious concern for the economic health of this country. As noble Lords have said, SMEs are of vital importance. They employ 60 per cent of our private sector, a total of 13 million people. They could be described as the engine of the British economy.

I accept that the Government have taken measures to deal with the plight of SMEs and I am refreshed by the importance that the noble Lord, Lord Mandelson, attached to the survival of SMEs in his opening speech. In the Pre-Budget Report, the Chancellor presented a series of measures totalling £7 billion to assist SMEs, including funding from the European Investment Bank, a further £1 billion credit offered to worthy businesses through a temporary small business finance scheme, the ability to spread tax repayments and a delay in the increase in corporation tax. I commend the Government for this action, as it will provide some assistance in maintaining liquidity.

Many SMEs are worthy, well run and viable. These actions will help. Furthermore, I accept that many in the business lobby have reacted positively to government action. Although I commend the Government for recent action, I ask whether more could have been done, as other noble Lords have said. The Minister, the noble Lord, Lord Bilimoria, and my noble friend Lord MacGregor cited the results of the recent survey by the Federation of Small Businesses. Perhaps I can add some other statistics from the same survey: 60 per cent of the 5,000 companies surveyed reported a deterioration in trading, 40 per cent have cash-flow headaches and have to wait longer to be paid, and 33 per cent are considering making redundancies.

This leads me to the effect of recent government actions on, for want of a better description, the horticultural economy, an area in which I have experience. The effects of the PBR on the horticultural industry have simply not been as was intended. The change to VAT, as other noble Lords have said, could have been described as a £12 billion government own goal. Implementing the change now and the further change in 12 months is high in cost and highly disruptive. Furthermore, substantial ordinary and extraordinary price cutting on the high street is overshadowing any decrease in VAT. This is preventing SMEs in the horticultural sector from gaining any advantage from the VAT cut. The weakness of sterling is increasing the cost of anything imported, further outweighing this costly and disruptive cut.

The VAT decrease is having little effect on the export market. The collapse against the euro and dollar does not immediately allow businesses to switch to being exporters. The capacity, skills and relationships required for effective exporting to an entirely new customer base take a significant amount of time to develop. Furthermore, the weak pound is counterbalancing key operating costs such as the decrease in energy prices. These effects have led to negative consequences for the environment and employment. There is already an accelerated level of job losses in the manufacturing industry as demand has slowed. Furthermore, this is expected to decrease employment in retailing, marketing and research and development after the Christmas period. These "soft" business divisions are essential for the growth, competitiveness and development of any business in a global economy. Consequently, they would be essential to any change from import to export.

Despite the Chancellor's insistence that climate change will not be overshadowed by the economic difficulties, pressures on the business front line are causing the reverse. Growing business and personal finance problems are preventing the long-term environment mindset from prevailing in business decisions. Sadly, this is simply because it can no longer be afforded.

The noble Lord, Lord Borrie, raised the subject of penalties for non-payment of outstanding accounts. Legislation is already in place, and I agree with what he said, particularly when he referred to repeat business.

We are in a situation where well run small businesses throughout the country are threatened by the consequences of bad business practice on the part of the country's banks. As one journalist said, only SMEs contributed more in deposits than they withdrew in credit in recent times. Yet it is they who are most vulnerable to the rapidly changing economy; they are in the terrible position of being at the sharp end of a crisis that they contributed very little to. SMEs are in the front line of this economic battle. Despite this, the assessment of the Horticultural Trades Association suggests that SMEs in this sector and possibly many others have been left with little with which to tackle liquidity issues. Even excluding the problems associated with the VAT cut, the decreasing strength of sterling and employment issues, a £7 billion stimulus package is insufficient for a sector employing 13 million people. Currently, SMEs leading the economic fight-back have few resources to tackle the enemies of decreasing liquidity, demand and credit.