Second Reading

Part of Small Business, Enterprise and Employment Bill – in the House of Lords at 4:20 pm on 2nd December 2014.

Alert me about debates like this

Photo of Lord Kestenbaum Lord Kestenbaum Labour 4:20 pm, 2nd December 2014

My Lords, this is such vital legislation and its core intention must be broadly welcomed by those noble Lords who remain desperately concerned by the uneven growth in large parts of the UK, so it would be churlish of noble Lords in all parts of the House to seem reluctant to praise good intentions when they see them. Yet so many of the interventions proposed in the Bill seem just that—modest, timid and good intentions. We do not need to go further than the Government’s own yardstick for the Bill:

“The … Bill has two fundamental purposes, one of which is to help small businesses grow … and the other is to ensure that the UK continues to be regarded as a … fair place in which to do business”.—[Hansard, Commons, 16/7/14; col. 906.]

I trust that my noble friends on this side of the House may well question whether the Bill meets that latter objective, the fairness agenda, but I fear not. However, I am convinced that it does not go remotely far enough in respect of the former objective—helping small businesses to grow.

We know what we are up against when it comes to driving small business growth. We know that the most imaginative global economies, the trend-setters of entrepreneurial zeal—the United States, Finland, Korea, Israel—all have substantial measures of supportive, and indeed aggressive, public policy and effective financing to drive their small business agenda. They have active, assertive, long-term and growth-oriented Governments who go much further than piecemeal and disconnected interventions that often lack in ambition and do little for an economy that, as someone recently put it, has become,

“drugged up on cheap money, subsidised credit and rock-bottom interest rates”.

So what might we reasonably expect at this fragile time from those with their hands on the policy levers? The first thing is an acknowledgment of what the Bill has definitely side-stepped: how to create the conditions for businesses that have the ambition and the potential to grow fast. As the horror of worklessness increases in so many parts of the UK, we know exactly where the next generation of jobs will come from. All the evidence shows, again and again, that small, innovative and high-growth firms will be producing the jobs of the future. These firms have a disproportionate impact on our national fortune and, crucially, they are creating jobs: just 7% of businesses in the UK classified as small, innovative and with high-growth potential are responsible for creating over half the new jobs in the past decade. These firms will produce tomorrow’s jobs and will be the productivity drivers of our economy.

What are those firms currently telling us? That the very businesses that are at the core of any attempt to rebalance and grow our economy are the very businesses to which banks right now are doing one of four things: not lending fast enough; not lending in sufficient amounts; not lending on reasonable terms; or just not lending at all. The lack of long-term patient capital, the lending infrastructure on which all small business growth depends, needs nothing less than a complete overhaul. To be serious with this legislation is to call for a financing revolution that targets the high-growth, high-productivity, ambitious small businesses that create our jobs. We need the type of legislation that propels innovative, enlightened and, yes, progressive new entrants into the world of financing—everything, from peer-to-peer structures that compete with banks to big institutions supported by government that target this sector. Surely we can go further than what we have heard today in this House about banks sharing information regarding loans declined with online platforms.

We just do not have the necessary degree of scale and ambition in the Bill in front of us. Instead, at a time of retrenchment in the banking sector and nervousness among investors, we see modest steps from government, and that makes it harder and harder for small businesses to grow. Can the Minister give the House some reassurance that we can go substantially further in helping small businesses access finance? As banks tighten lending criteria to strengthen their balance sheets and as risk capital from the private sector becomes more scarce, what are the consequences? The very businesses I referred to earlier—those with ambition and the potential to grow fast—are most at risk unless the Bill becomes less timid and more assertive.

Consider this: the most recent research conducted by Stian Westlake and his colleagues at Nesta shows, starkly, that simply encouraging lots of people to found businesses and then doing very little of consequence to support their growth in a meaningful way will do nothing for the economy. Further, the loss to our national prosperity by not making the UK a better place—not just for founding businesses but for scaling them—is staggering. Nesta’s research, The Other Productivity Puzzle, shows that over a 10-year period the loss to the economy due to the stagnation of the most productive small businesses was 7.4 percentage points of productivity, which totalled £96 billion of lost GDP per annum.

That evidence tells us what we have long sensed: that the most dynamic, most productive firms, which in turn create the largest number of new jobs, struggle to grow because the infrastructure of financing is just not there for them meaningfully to scale up. The impact of that on Britain’s productivity has been eyewatering. If we are talking about stakes as high as £96 billion per annum of lost GDP, why are we considering such a modest Bill, with such modest interventions? They are of course helpful, but at best, perhaps, they will keep fragile and small businesses just that—fragile and small.

Too many aspects of the Bill are reflective of much business policy in the last four years. Too many timid programmes, often disconnected, have been launched with fanfare and quietly closed 18 months later. We hope instead for an assertive, ambitious national programme which runs right through government, which will allow us to compete with the world’s most dynamic economies and which in turn sustains the fair society we must nurture here in Britain.