How To Create Economic Growth

A Dummies Guide For Our Simpleton Chancellor

Wednesday’s mini budget demonstrated that Rachel from accounts doesn’t understand how to deliver growth. Her advisors in His Majesty’s Treasury don’t either. The support they give Reeves (and gave her predecessors) is about as much use as a chocolate fireguard. The reason is simple; Mandarins with economics degrees and MBAs treat growth as an abstract parameter in a complicated mathematical model. In the market stalls, offices and factories of the private sector everyone knows that growth is both bloody difficult and utterly essential for survival. (Those who live in ivory towers don’t appreciate existential risks either). So, as a concerned citizen, here’s an explanation of what growth is, why it’s so darn difficult to deliver and what, if anything, a government (benighted or otherwise) can do to help.

Growth = Selling More Stuff. To whom?

In the UK some 98% of all businesses have fewer than 50 employees . They account for about 50% of UK employment and generate 35% of UK private sector turnover. At least 20% of the private sector is sole proprietors. https://www.money.co.uk/business/business-statistics These businesses are almost all owner managed, meaning that the risk of failure falls heavily, personally and entirely upon the CEO.

At the commercial coal face, growth means increasing sales income and (with luck) profit. There are three broad ways to do this. Simplest is to increase the price of stuff, which risks driving business to competitors. Second is to sell more stuff, which requires finding more customers and building the commercial infrastructure to serve them. Finally one could sell new stuff to existing customers, which of course includes all the risks and costs of developing the new stuff.

All of the above options for growth require cash up front, whether it’s a marketing campaign, increasing stock levels, hiring sales and support staff or funding product development. That cash can only come from four places. Accumulated profits from previous trading years, loans, equity investment or grants. For an owner managed SME any profit reinvested in the business is money not used to feed children, pay the mortgage or clear company borrowings secured by personal guarantee. As most people work to put food on the table and keep a roof over their heads jeopardising that is not undertaken lightly.

Funding Expansion Ain’t Easy

Which of course is exactly the problem with loans to SMEs. About one third of SMEs have some form of finance protected by the founder’s personal guarantee. SMEs are often, rightly, described as the engine room of the economy, but the growth they produce comes at huge personal risk. There is no point blaming the banks – their job is to make loans secure to protect their own shareholders and many SMEs are very perilous entities. There are government funded loan guarantees available, which take some of the risk away from the founder for some loans. They’re not available for every purpose.

Finding equity funding is time consuming and expensive. Most SMEs are only likely to get funding from business angels, some of whom are excellent and some of whom are Dragons Den wannabes. If they’re sensible they’ll be investing what they can afford to lose, say 5% of their net wealth excluding their house. So if the SME wants a £100,000 investment it’s looking for investment from a person with a net worth of over £2 million. They’re quite rare.

Government grants tend to be sector specific and the Quangos that award them are more likely to be run by local government apparatchiks than self-made millionaires who understand building businesses. The grant landscape is constantly changing and the process can involve an awful lot of box ticking and hoop jumping. All the time an owner manager spends doing that is not time spent running the existing business.

Finding New Customers Is Harder

Having got the money all one has to do is find more customers. While there are plenty “out there”, customers are looking for affordable, punctual, quality. Whether it’s a car, a washing machine or a meal. The customer has a range of options and will probably consider at least three. In retail sales that consideration probably began at the sight of an advertisement or when the existing product failed. For business customers the purchase will be part of a business plan produced last year and to be delivered some time this year. There many be a tendering scheme that will typically call for tenders from the world. The business will sift the tenders to a shortlist of three or four, invest significant time (money) in comparing them and then select.

The implication is that between 75% and 66% of tenders our business submits will fail – consuming cash and damaging morale. When it wins it can expect to be beaten up on price, and of course that price must cover all the costs of failed tenders, plus the cost of capital and a margin for the company’s owners.

It’s even worse for Rachel from accounts as she wants the entire economy to grow. Companies whose new business comes from taking existing business from a competitor cancel out at the national scale. GDP is the aggregation of commercial activity, if Company A’s business is up at the expense of Company B’s turnover national GDP is unchanged. Worse, if Company A won the business at a lower price (as is common) GDP is reduced. Amazon founder Jeff Bezos said “your profit margin is my opportunity” https://www.marketplacepulse.com/articles/the-cost-of-your-margin-is-my-opportunity If prices fall GDP goes down; Amazon’s success is far from penalty free. There’s a research topic for an academic economist..

Like most of her predecessors, Rachel is praying for growth as it’s the only way out of the UK’s economic woe. What could she do to make it more likely?

Making Capital Cheaper

As we’ve seen, growth requires capital and involves considerable risk. A sensible Chancellor would reduce the cost of capital though cutting corporation tax. Corporation tax generated about £94 billion for the government last year. The rate is currently 19% for profits under £50K rising to 25% for profits over £250K. According to Rishi Sunak, who set the current rates, 70% of companies made profits of under £50,000. About 1.5 million companies pay corporation tax, so the small 70% contribute no more than £10 billion to the Treasury.

That’s a rounding error in the government’s £1,300 billion annual spending. Abolishing corporation tax under £50,000 profit would reduce the cost of a company’s growth capital and immediately put £10 billion into small company growth. If she was wise, she would also set out a series of reductions in the top rate of corporation tax, thereby attracting established companies to the UK. As the charts below form Trading Economics show, cutting corporation tax worked for Ireland; it would work for us.

Correlation is not causation of course, but this approach is worthy of more investigation that Rachel or the Treasury have done. There’s a reason the likes of Amazon are domiciled in Ireland and it’s not the black stuff, the blarney or the craic.

It gets better. About £20 billion of corporate taxes are paid by the City, which is currently stagnant. Signalling a substantial tax cut should attract foreign domiciled firms as well as stimulating domestic ones. An influx of companies would be the sort of therapy that it needs. An influx of tax conscious financial firms back to the City would trickle down into the support industries, reverse the City’s decline and possibly even start a boom. Of course, Reeves would have to explain this very carefully to the bond markets to avoid a repeat of the Truss fiasco, but that’s not impossible for a competent and impressive Chancellor. That’s not Reeves, but with her financial plans in tatters UK Gilt investors might look more kindly upon an economy that has a plan than the current spiral of decline.

Taking The Risk Out of Hiring

The second thing a competent Chancellor would do is understand that delivering growth requires speculative hires of more staff. Reeve’s benighted policy of massively increasing employer’s NI (which cuts in next month) is a major obstacle to growth. Even the BBC knows this. Worse, the changes to workers’ rights make it expensive for companies to get rid of hires that don’t work out. Does Reeves think this will make companies more or less inclined to risk hiring the staff they need to expand? And what about the (allegedly) high powered intellects of the Treasury who are supposed to advise her. Can they not see the likely impact on the economy.

The stark truth of the economic lunacy of this government are being laid bare. They will become more painfully obvious in the next quarter. That should not be a surprise. In January Begbies Traynor (a well-established business recovery firm) published data showing a 50% increase in the number of firms in critical financial distress (industry speak for up the creek without a paddle). Don’t the Treasury mandarins read this stuff?

Blame Net Zero, Not Trump

Of course, Reeves is blaming President Trump, President Putin and the rest of the world. Perhaps, but the rest of the world is beyond her control. What she could control is the third thread of lunacy that the Marxist cabal is imposing despite the lack of any evident, Net Zero. Sure, she’s fighting to extend Heathrow, but that will take decades.

In the short term the switch to green generation has simply imperilled supply and driven UK electricity prices inexorably up. According to the IEA the UK has the most expensive electricity in the countries they cover. It’s not just electricity; gas costs five times more in the UK than it does in the USA. She should end net zero. She should also scrap the electric car sales targets that are doing so much damage to the car trade. It’s already under review, but the reality is that fewer people want to buy an EV than the government targets. Axing the EV the subsidies, would save her budget a few quid too.

The UK economy was in a mess before the general election. However in her nine months at the helm Reeves has made it much, much worse. Chancellors of the Exchequer often talk of “the green shoots of recovery.” Rather than gently watering with fertiliser Rachel is pouring weedkiller.

Better Politicians not Careerists

The mess we’re in is the inevitable consequence of the rise of the professional politician who typically have near zero experience of commerce. There is, or perhaps was, one party that eschews career politicians in favour of real people – and that is Reform. While Nigel Farage made some strong points against the Chancellor’s Spring Statement Reform has yet to produce alternative policies. That’s inexplicable given they had them for the General Election. It’s also increasingly vital – this government might not survive until 2029. Reform needs to produce a clear vision of what it intends to do and, crucially, why that will work and how Reform will drive it through.

The National Institute of Economic and Social Research sent me a report on the Spring Statement. The accompanying email read:

“The focus of yesterday's Spring Statement on introducing measures to adhere to a set of self-imposed fiscal rules, rather than improving long-term trend growth, was unfortunate. Fixating on the details of fiscal book-keeping detracts from the wider problem: the current fiscal framework is not fit for purpose.”

“Unfortunate” is Sir Humphrey speak for disastrous. The full report is damning. The UK is in a mess and the only light on the horizon, Reform UK, is conducting internecine warfare when it should be developing an alternative economic plan.

I’m very depressed.

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