The post Johnson outlook for SME growth
SMEs have had a rocky ride of late. Post-pandemic recovery progress was hit by skyrocketing inflation and an increased cost of living.
“We were seeing strong growth for SMEs through 2021. The growth has plateaued this year. We see strong headwinds,” said Chirag Shah, Founder, and CEO of Nucleus Commercial Finance. “The labor issues have been quite severe. You’ve got large businesses really suffering. And I feel that the problem is even more acute for many SMEs.”
Amid the economic pressures on SMEs, the uncertainty has increased tenfold following the resignation of Boris Johnson.
“Political instability doesn’t help,” said Shah. “We always say stability is crucial for businesses because then people can make confident decisions related to investments. When there is instability, it just drives everyone away from investing.”
Rising energy costs dash hopes of growth
In early July, Nucleus reported that 57% of SMEs remained bullish about their outlook for the next 12 months. Their research found that just under half of small and large businesses had growth and innovation as their goals for 2022; medium-sized companies focused more on recruitment and staff retention.
Despite this, dreams of growth may be dwindling as there continues to be a threat of rising costs. A focus on survival is now present, and 28% of the SMEs surveyed focused more on staying afloat rather than cementing growth. Lending platform iwoca found in April that one in four SMEs had already raised prices to absorb rising costs.
Over a third of small businesses saw increases in energy prices by up to 20%, and 30% have decided to reduce energy consumption to counteract the cost, even though it may negatively impact their business.
“Small business owners around the UK face a double hit on energy bills – at home and for their business,” said Seema Desai, iwoca’s COO. “While households are protected by the energy price cap, businesses are left exposed to skyrocketing prices. Many small businesses cannot absorb the costs of higher bills, meaning increased prices and business closures will hit customers.”
SME investment stagnant despite UK’s ‘super deduction’
In April 2021, the UK government announced a two-year “super deduction” tax rate scheme offering a tax cut of 25p for every £1 invested. Their project announcement stated, “This super-deduction will encourage firms to invest in productivity-enhancing plant and machinery assets that will help them grow, and to make those investments now.”
Nucleus found in a survey conducted in Jun 2022 that just 13% of UK SMEs increased investments due to this announcement, with 16% decreasing investment.
Challenges in securing investment are becoming ever more prominent; 27% saw them as a critical factor in the UK’s ‘investment gap.’ Companies in the UK invest 10% of the country’s GDP each year, compared to 14% in “rival” countries. Economic uncertainty, high tax burdens, and a lack of government incentives were identified as primary causes.
As part of the Spring Statment, then Chancellor Rishi Sunak, now a forerunner in the race to replace Johnson, announced various initiatives to support SME growth. These included business rate relief, 0% VAT on energy-saving materials, and an increase in employment allowance. In 2023, R&D tax relief was also set to be implemented.
In recent debates, Liz Truss, his opponent, announced pledges to cut rises in corporation tax, which Sunak dubbed as inflationary long term, stating that the current inflation should be curbed before introducing further cuts on tax.
More long-term impactful solutions needed
Chirag called for more impactful efforts from the future Downing Street successor. “UK SMEs are ambitious and hungry to grow, but it’s incredibly frustrating that too often the odds are seemingly stacked against them,” he said. “It is imperative that the shake-up in Downing Street results in a more impactful business strategy from the government. With its support, finance providers can help businesses seize the growth opportunities and power the UK forward.”
“We need to structure solutions with more medium to long-term impact in mind, not just short-term fixes. I think that’s going to be very critical going forward. Now, it’s more about planning what the businesses need over the next three to five years.”
“There are a host of ways that government can really get behind businesses and stimulate innovation by thinking creatively. Change in Number 10 offers a chance for a reset, a rethink, and a redoubling of efforts.”
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