Economic recovery: why do we still get it so wrong on small businesses? | Observer editorial

Building a long-term recovery means ensuring these potential star performers have access to long-term growth capital

Our collective urge to don short sleeves and herald the barbecue summer at the first sign of spring is quintessentially British. Last week’s GDP figures may be the tenderest of green shoots, but the psychological impact a triple dip would have had on the national psyche cannot be gauged.

If we are to swap the dark days for dog days, we must ask how to nurture these fragile signs of recovery. In the debate dividing left and right, Keynesian and deficit hawk, infrastructure investment and shares for rights, the balance of economic opinion is gradually shifting from the latter to the former. Yet if jobs are the metric by which recovery is measured, we should not forget that in the years preceding the crisis, a core of small but high-growth companies – just 6% of all firms – between them generated more than half of new jobs.

Building a long-term recovery must mean ensuring these potential star performers have access to long-term growth capital. Even at the top of the cycle, smaller businesses find it harder to achieve: the fixed costs of due diligence can quickly erode the incentive for lenders and investors to take a risk. Add the impact of the global financial crisis on bank lending and investor confidence and the growth potential of these businesses risks being severely limited.

This has long been recognised by our global competitors: countries such as the United States and Germany have had schemes in place since the 1950s to ensure growing businesses can access long-term finance. In contrast, Britain’s postwar equivalent, the Industrial Commercial and Finance Corporation, was sold off in the 1980s. It has taken the financial crisis to bring state intervention back in vogue: all the main parties have now signed up to the idea of a business investment bank.

But as the government’s desperate re-engineering of the funding for lending scheme last week reminds us, we ignore the international lessons at our peril. Political commitment to broad-brush concept is insufficient. The principle at the heart of the successful American and German schemes is market catalysis rather than replacement. These schemes are smartly designed to make a difference, by making finance available to businesses just below the threshold, not to those able to access it anyway. They harness private sector intelligence: investment decisions are made by private banks and investors that stand to make amplified losses and gains, rather than being allowed to gamble away government-guaranteed, risk-free cash.

These schemes are long-standing. In contrast, the UK has seen several schemes reinvented in just the last few years. Elsewhere, they operate in highly competitive banking systems, while in the UK four banks supply more than eight in 10 small and medium enterprise accounts. And the US and German schemes are there for good times and bad. The US and German governments used their pre-existing schemes to get finance out of the door immediately after the crisis; we are still waiting for the government’s promised business bank five years later.

For now, the nation’s barbecues remain in the garage. Getting its business bank right is crucial if the government is to make the most of any boost in business confidence generated by the welcome, but fledgling, signs of recovery. © 2013 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds

Enjoyed this post? Share it!


Leave a comment

Your email address will not be published.