A capital idea? A change of approach to helping small firms to increase their investment

KEY POINTS

• Between 1997 and 2021, investment levels in the UK were 4.9 percentage points of GDP lower than the OECD average. This equates to an annual £109 billion “investment deficit”.
• SMEs account for 99% of the UK’s business population and generate around half of private sector output. Therefore, any ambition to boost the UK’s aggregate long-term investment levels must have a focus on increasing investment by SMEs.
• Cuts in corporation tax rates have had little noticeable long-term impact. The introduction of full expensing for plant and machinery is only expected to make a relatively small difference, with the impact on SME investment potentially smaller still.
• To achieve the kind of shift in SME investment behaviour that will feed through into a substantial long-term increase in aggregate business investment, a more strategic approach to the role of SME investment in the aggregate picture is needed. One that stands in contrast to the somewhat unnuanced focus on corporation tax rate cuts, and which is also likely to result in a larger positive impact on SME investment levels than full expensing.
• Three key challenges holding back SME investment behaviour: liquidity, lack of sufficient savings, and limited financial management capabilities.

RECOMMENDATIONS

• Make the “Fair Payment Code” compulsory for all large enterprises in the UK underpinned by a stronger Small Business Commissioner (SBC).
• Introduce a system for SME employers to recoup some of the costs that they incur acting as unpaid tax administrators.
• Introduce an allowance for retained earnings for smaller firms.
• Develop a formally accredited, nationally accessible and subsidised financial management training offer for SMEs.