Monday, 22 October 2012

"Unburdening enterprise"

Today, the Adam Smith Institute published my paper on the deregulation of UK small and medium-sized businesses (SMEs), entitled "Unburdening Enterprise. Reducing regulation for small & medium businesses". 

The paper received coverage in the Financial Times, The Times (both require subscription access), Conservative Home, Politics (where in both, ASI's policy director Sam Bowman wrote good pieces outlining the main proposals of the report), and many others. 

Here is a blog post I wrote for the ASI to sum up the report. I will quote it in full: 

"Regulatory confinements very often result in wrong policy perceptions and adverse policy conclusions. In an attempt to create a safer environment they impose a number of rules, procedures, and amendments to these rules that eventually end up stifling companies and diverting their resources away from productive activities. This is particularly endangering for small and medium-sized businesses (SMEs), considered to be the drivers of growth in an economy.

Small and medium-sized businesses make up an integral part of the private sector. The recovery depends on them to create jobs and replace public sector spending. But we cannot expect them to flourish under current regulatory and tax conditions. The focus of the ASI’s new report Unburdening Enterprise was to identify the most cumbersome and harmful regulations, taxes, and other barriers to growth and to offer possible solutions to relieve the businesses of these burdens. Having undergone a range of surveys among businesses, several constraints were recognized, including employer’s national insurance contributions being too high, problems with access to finance, regulatory compliance costs, hiring obstacles, fear of employment tribunal, and a lack of confidence due to the uncertainty regarding the unfolding of the recession.

With the UK experiencing deteriorating productivity, keeping on inefficient workers subject to employment law protection is a policy that will keep productivity low for quite some time. Low productivity is a sign of an economy stuck in a structural shock (bad equilibrium). Domestic competitiveness is deteriorating, making domestic businesses inflexible in adapting to market conditions. This will only make them more prone to failure.

It these times of uncertainty and lack of confidence, government subsidies to businesses in favoured industries won’t create an incentive to invest or hire more. Just like the banks, the businesses choose to hoard cash since they are uncertain on the future returns on their investments. On the other hand, the private sector is currently engaged in a massive deleveraging process. Introducing subsidies and stimuli will only shift the resources from making profits on their regular markets onto making favours on the political market in order to attract the subsidies. Cutting costs creates a completely different incentive – it gives the business an incentive to use its resources more efficiently and to transfer them into more production or more hiring. 

This report aimed to show how decreasing costs for businesses is a much wiser, cheaper and efficient policy than a subsidy or a fiscal stimulus, as it creates economically better incentives for businesses. It is particularly important to create a healthy, competitive, market environment where firms compete for customers rather than political or bureaucratic favours. Otherwise, we are dangerously close to a system of crony capitalism where political signals rather than consumer demand drive the incentives of the private sector.

The plea for less regulation doesn’t imply removing all regulation since SMEs need a sense of reliability and guarantee in order to be considered a credible borrower. Deregulation is a call for reducing and removing all those regulative, administrative, and legal burdens that exemplify adverse use of resources and constrain a business in its growth and development.

The report’s main proposals include:
  • Abolish employers’ National Insurance contributions. This proposal has a potential of creating a minimum of 500,000 jobs by relaxing the tax burden on employment.
  • Reverse the 5.6% increase in business rates from April 2012 to free up funds for businesses.
  • Substantially reduce costs for the SMEs by removing all unnecessary administrational burdens. The government should continue with its deregulatory agenda demanding higher efficiency from all departments.
  • Simplify the regulatory system for SMEs in order to remove the necessity of hiring lawyers and accountants to help them comply with regulatory standards. Simplification should benefit all UK SMEs.
  • Put a stop to all new regulation coming in from EU that targets SMEs. This will save them a total of £100bn per year (£23,000 per business) – enough to hire an additional employee or invest into new capital creation and production.
  • Make it easier for employers to fire employees for misconduct. This will make it more attractive for employers to hire, and will increase labour market flexibility.
  • Encourage businesses to take more temporary, zero-hour and fixed term employees. Introduce the option of self-employment for SMEs. It saves money, increases job creation and channels resources into profit-making opportunities.
  • Remove the minimum wage to create youth jobs.
  • Encourage private sector solutions to help businesses chase late payments and increase their availability to credit."

5 comments:

  1. congratulations, . I know that academics labor on their subject and rarely get any recognition. It is good to be noticed, and that your work is deemed valuable.

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  2. Congrats! Great paper, this is exactly what Britain needs at the moment: a focus on private sector growth via cost-reduction incentives. And the only way to reduce costs is to reduce the government burdens

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  3. Excellent paper, I most certainly agree with most of your recommendations. Particularly with the hike in business rates, EU regulation, and regulatory simplification.
    but I can't help at asking how is abolishing minimum wage good for jobs? Even if an initial effect is an increase in hiring for a miserable wage, what would be the social effects of such a policy?

    In addition, who is to guarantee that the youths receiving the lower initial salary, won't be kept on this salary for a decade or so? If the business owner finds it favourable now, he will find it favourable in the future as well. In his planning of the business year he won't be thinking of increasing his biggest cost burden, but leaving it as it is.
    Perhaps this is a good policy in a purely economic sense, but I see terrible welfare implications if it were implemented...

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    1. the minimum wage law seems to be a bigger issue than the potential impact it can have in an economy. Even if you think of the welfare implications. For example this is a quote from my newest text on the size and efficiency of government:

      "There is no national minimum wage in any of the EU Nordics. Taxation for social spending tends to be bottom up rather than top down. In Denmark, as an example, the social security taxation is set by the commune, a grouping of as few as 10,000 people. The rate might be 25 - 30% added to that national income tax noted above. This is collected and spent locally. Sure, communes will group together to set up services a single commune would not need: specialist hospitals for example. But money and decisions are local, only moving to a higher level when necessary."

      If the Nordic countries don't need it, and they seem to be a forefront for an equal society, then I see no reason why the same wouldn't be applicable elsewhere or why removing the minimum wage could have potentially terrible welfare implications..

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