Oral evidence: Government Support for BusinessHC 770-iTuesday 11 November 2014

Oral evidence, 11 November 2014.

Witnesses

Phil Orford MBE, Chief Executive, Forum of Private Business, and Dr Kevin Farnsworth, Senior Lecturer, University of York, gave evidence.

Chair

Good morning, and welcome. Could I just ask you to introduce yourselves for voice transcription purposes, starting with you, Phil?

Phil Orford

Yes, good morning. My name is Phil Orford. I am the Chief Executive of the Forum of Private Business. We are also a small business lobby group. Our membership is primarily made up of small employers.

Dr Farnsworth

I am Kevin Farnsworth. I am Senior Lecturer in Social Policy, University of York.

Chair

Thanks. We have to finish by 10 to 11, so I would appreciate brevity, and I will try to brief as well. This one is to you, Dr Farnsworth. You have written extensively about “corporate welfare” and the role of business and the Government. How would you define the Government’s respective roles and responsibilities when it comes to supporting business?

Dr Farnsworth

Perhaps I can just say a little about corporate welfare and how I define it first. I define corporate welfare at its simplest to refer to the various benefits and Government services that help in some way to satisfy the needs and, in some instances, the interests of business. My work in this area, I think, extends this notion of corporate welfare. It is not necessarily critical of corporate welfare. I want to say that first of all. It extends the notion of corporate welfare beyond perhaps what this Committee will focus on most, which is the grants and subsidies offered to business. It tries to view the range of Government benefits and services in the round, and the ways in which those benefits and services satisfy the needs of business. I am interested in looking just as much at public and social welfare, and how they satisfy the needs of business, as more direct forms of provision, which would be included within, as I said, most of the things that this Committee will be looking at. In terms of how I see the roles, I think that it is really important, first of all, to accept that businesses need help and support from the state. I am really grateful to come along here to talk about this here today. If we look at this historically, or across nations, Government support to business is comprehensive, and always has been. As I said, it is really important for this Committee to begin with that kind of premise, but then to look at the range of benefits and services, and also how they interact with each other.

Chair

You talked about this being more than just Government schemes and so on. Obviously, there are usually metrics by which the Government can measure the impact of Government schemes on business. The broader approach that you talked about is more difficult to measure. Could I ask both of you, but starting with you, Kevin, how you might measure the impact of corporate welfare on things like employment, growth, taxes and so on?

Dr Farnsworth

In my work, the most difficult thing is just trying to identify and conceptualise what we might mean by corporate welfare, and how these different services do help businesses. They are important. If I just digress slightly, if we look at the evidence submitted to this Committee, it is clear that some of that evidence suggests that a whole range of provision is really important. In fact, if you look at things like the Crediton Chamber of Commerce submission, their argument is that the range of schemes on offer is far less important, for example, than welfare tax credits, and education and training provision, in assisting businesses. If we look at what the CBI is saying this week about the importance of child credits and taking more people out of tax, it is clear that there is a whole range of provision out there that is really important to business. How do we measure it? I am just putting together the finishing touches to a report that I am happy to submit to the Committee, possibly under embargo until it is out fully, which tries to systematically go through some of these things. I start with grants and subsidies, and look at how much they are worth. In education, we have measures of added value that often apply. We can look at the value of that for businesses.

Chair

Can I just intervene at that point? Yes, we do have measures for added value. What we do not have is measures for, if you like, added value to business.

Dr Farnsworth

No.

Chair

Do you think that might be something that we should look at as part of engagement—

Dr Farnsworth

That is absolutely something that should be looked at. The best we have, and this is from private correspondence with a civil servant working in this area, is to look at added value, and to equate added value for individuals with added value for businesses. Obviously, there is a very close relationship between the two. We can look at those things. In terms of things like tax credits, tax credits are important for individuals on low incomes. They also operate, in some ways, as a wage subsidy. We might also look at that. Again, there is not necessarily anything wrong with that, but if we do think of them as wage subsidies, maybe we have to think of the whole system of assistance to businesses, and taxation paid by businesses, and the whole range of things, as being really important. As I said, it goes beyond maybe the more obvious things that happen within BIS.

Phil Orford

I think, bringing it right back down to perhaps its most basic level, business owners look at the benefits of inputs by looking at the outputs, and the output is profitability. In terms of measuring the impact of Government schemes, you have to look at the bottom‑line outputs. Are businesses more profitable? Are tax takes up? Is employment rising? These are relatively straightforward measures to seek, I would have thought.

Mike Crockart

Dr Farnsworth, in your submission you wrote that “part of the problem is that there is very little recognition or acceptance of the fact that public policies operate in the interests of business”. Who is it that you feel has that perception? Is it the public generally, or is it business specifically?

Dr Farnsworth

It is both. There is an overriding public perception, I think, and we know this through surveys of citizens relating to social welfare, that we associate expenditure on education and training as being about citizens. We associate state spending on the welfare state and on benefits as being about citizens. That is a perception of citizens. In my work, for some time, I have also looked at some key approaches to public policy by organisations like the CBI. I think, again, that is really interesting and telling, because although the CBI will occasionally acknowledge that education is pretty important, and even at times have argued that healthcare is really important, they do not necessarily see that as something that is about businesses per se. In fact, the general approach of business organisations that I tend to look at is that at one particular time and one particular year, business will be more willing to accept that there is an important wider benefit from public policy, but it does not necessarily acknowledge that more broadly.

Mike Crockart

Is that the case? We have just had evidence from FSB, where they are talking about the number three priority being greater skills for employees going into their businesses. CBI yesterday said the biggest asset they had was childcare. Neither of those are BIS issues, per se; they are much more wide. Does that not argue against what you are saying, and that business does realise that there is a far wider variety of things that feed into and are benefiting them?

Dr Farnsworth

Yes and no. As I said, I am not saying that business organisations are always completely in denial about these things. If there is one summary view, it is that businesses occasionally acknowledge the benefits of some of these things. Education and training is pretty consistent across time. They occasionally do acknowledge it. They do not necessarily acknowledge that businesses should be the ones that are paying for this; because lots of these services are consumed by citizens, businesses should not necessarily be paying for those things. The CBI is a really interesting case study. Again, I would urge the Committee to look at what the CBI has said over time, and some of it I have written up myself. As I said, it is inconsistent. During certain periods, they will focus on certain aspects of policy. Back in 1983, the CBI did quite a bit on the benefits of the National Health Service, for example, and have barely talked about it ever since.

Mike Crockart

Can I ask then, because we are quite short of time, what needs to change to change that perception? Is it just raising awareness? Is it engagement with business? What needs to change to deal with that?

Dr Farnsworth

It is both. It is raising awareness. It starts here, but in a way what this Committee might do is focus almost entirely on what BIS does. I would argue that it is changing perception and looking beyond that, so that we can have a really important debate. That debate is not just about, as I said, how public provision satisfies the needs and interests of business. It is also about how they satisfy the needs of citizens, and the relationship between the two. Business subsidies, for example, or business grants, do have really important outcomes for citizens. A whole range of services that are directed at citizens have real benefits for business, too, and we have to look at it in the whole.

Phil Orford

As well as doing what I do in my day‑to‑day job, I am also governor of an academy, and a chair of governors at a studio school. There are not that many studio schools in the UK at the moment, but they are focused on career pathways. Our school in particular focuses on five career pathways, which are specifically defined to support the skill need within the school’s constituency. That is proving a very successful model. We are getting about 18 to 20 studio schools opening per year, operated obviously by the Department for Education and the Studio Schools Trust. These are very positive, impactful, on‑the‑ground initiatives that are making a significant difference to the quality of the individuals coming out of those schools and the skill needs of the local businesses, which are often very small businesses. There are real good things happening. I do not think that is necessarily within the BIS remit currently, but in terms of the overall skills agenda, of course it is.

Chair

If you could send further details of this, it may not be central to this particular inquiry but is very interesting in the context of a number of other inquiries that we have had. I have one school in my constituency that is similar, but I do think we are interested in looking at models that could be carried forward.

Mr Binley

Your theory is an interesting one, which I have not seen in quite that way before. I would point out, however, that it is not accidental that the CBI grasps your context, on the basis that they are very big companies, and they have got quite a lot of money sloshing around. The small businessmen perhaps would not quite see it in the way you say, particularly when doctors put people on what they call “the sick” for two months, for stress. They get very stressed about that, I can tell you. You have got to be very careful about how you apply your theory, as between the CBI and the big corporates, and small businesses, which most of us are part of and deal with. I just wanted to make that comment to you, because your idea is interesting, but you have got to make that definition and understand what that definition means. The Government told us small companies “are not prepared to pay for advice”, which is the opposite end of your bit about welfare. For example, businesses pay up to £3,000 to take part in the GrowthAccelerator advice programme. Many of them, at the end of that, feel it was a bit of a waste of time. When I had Government advice when I started my business, which now employs 180 people, in 1989, I had people coming along telling me I was going to turn over £15 million within three years. The whole thing had no connection with my business whatsoever. What I really want to ask is: how do we make that early advice, primarily but not only to small businesses, meaningful? How we get it to be delivered by people who have the understanding of the sector, and are not, forgive this, academics who think they know and very often have not got a clue?

Dr Farnsworth

Who is that to, Brian?

Mr Binley

You, Phil.

Phil Orford

We are getting to the nub of business support, are we not, here? Businesses need state interventions. Businesses need support. Are businesses really saying they are not prepared to pay for business support? I do not think they are at all. They are paying for business support of one form or another, whether it is accountancy, whether it is legal, employment, or health and safety. We provide such services, as do other business organisations. The principle that businesses are not prepared to pay is wrong. To cut to the nub of the question, are we focusing in the right areas? Maybe not. One of the two lead campaigns at the moment is GrowthAccelerator, as you mentioned. Interestingly, feedback from our members is more positive. Often, business owners are saying the advice they were given was probably what they would have done anyway, but all it has done is reinforced their decision‑making process. It has created growth for a number of them and positive outcomes. At the other end of the scale, of course, a major Government initiative is start‑up loans, including significant numbers again, with 20,000 new start‑up businesses. However, to the nub of your question, those are initiatives at either end of the scale—high‑ambition growth businesses and start‑up businesses. We know that there are 1 million employers employing nine or fewer employees, and these average businesses that sit in the middle are not receiving the focus of business support. If they did receive it, I believe it would create quite a significant economic wave. If you took the 1 million and divided it by three, meaning that 300,000 are doing well, 300,000 not so well, and 300,000 are in the middle, and if we could touch them positively in the day‑to‑day issues of their business around people management, leadership and growth strategies, at a level that is way beyond what GrowthAccelerator can do in the top 6%, then we can make significant positive impact in the UK.

Mr Binley

Thank you, Phil. I do find your concept interesting, genuinely. It has considerable value, but I do want to know from you how you see the difference operating in your terms between the big corporates and where most of the employment growth and wealth growth comes from, which is the SME sector.

Dr Farnsworth

Although I talk about the CBI—I talked about the CBI just now because I was talking about business perceptions of that particular sector—I do think there are real implications for small businesses. Just to take one example of how these things relate to each other, Amazon has been awarded over £7 million by the Scottish Government, and almost £11 million by the Welsh Assembly, to build distribution centres, which obviously has big implications. The Public Accounts Committee went through this, in terms of tax take and impact on small businesses. It is really important to ask questions about whether that is a good use of public money. In particular, is that a good use of money, when it has implications for a whole range of other different services? Part of that assistance from Wales, for example, was devoted to building a new link road for Amazon’s distribution centre. Because they are distribution centres, so they are not necessarily liable to tax in the same way. That is just one example. That does not include also other work that is being carried out on the help and assistance that is given to workers working in those distribution centres. It is a good example, however, of how there is a relationship between the different parts of government and what they are doing, and the knock‑on effects here in terms of small businesses, to take your example.

Phil Orford

In a supportive way, if you look at the Regional Growth Fund, and particularly the first three phases of awards, there were some significant large business grants given out. Bentley, where we are in Cheshire, received £14 million for an apprenticeship centre. If Cheshire had been given £14 million to develop programmes related to grants which would have turned small business projects from not happening into happening, there would have been a significant positive impact. I absolutely agree. The concept of supporting businesses at that scale, with their wealth and, frankly, lack of taxation, is scandalous.

Mr Binley

I accept that point, and an audit of corporate welfare maybe every two or three years would be very useful. I simply direct your attention to the Formula 1 racetrack being built on the Brecon Beacons, supported massively by the Welsh Development Agency. Do I want to call it a pipe dream? Do I want to call it pie in the sky? Whatever. However, there is a lot of money being thrown at something that already exists in our country. One wonders why that is happening. A corporate audit linked to your corporate welfare seems to me to have considerable relevance.

Rebecca Harris

On the issue of access to finance, the British Bankers’ Association has told us that “while demand for lending has increased, SME holdings of cash have continued to rise strongly”. Why do you think this is?

Phil Orford

Can I touch very briefly on the previous session as well? I think there was something that was not covered off there. This Committee has investigated the access-to-finance issues on a number of occasions already. We have got to accept that the environment in which we operate now is different from that of 2008. It is different from the five years prior to that. Many of the issues around perception of cost and around access related to the fact that there was easy low‑cost finance accessible before the crisis. I think, frankly, politicians and business owners—my members—have got to get real about this. We are not going to significantly change what is happening in this landscape without serious new competition within the marketplace. It is just not going to happen. Sorry, what specifically was your question?

Rebecca Harris

It was that we were being told that SME holdings of cash are continuing to rise strongly.

Phil Orford

Yes. It reflects the ongoing uncertainty that businesses have. Our latest research, which is around the cost of doing business, not the cost of living, demonstrates that small business inflation is running at 4.7%. That is 3.1% of CPI. In the previous three years, it was running at above 6% every single year. Our members, small business owners, are day in, day out feeling input costs going up, without the ability to pass those costs on. At the same time, they are hearing unhelpful comments, such as from the Governor of the Bank of England, about early interest rate rises, which are now being pulled back. These things are really unhelpful, and do not help the environment of certainty, consistency and continuity, and therefore confidence. It does not surprise me at all that business owners are hoarding cash, small or large.

Rebecca Harris

Thank you. The British Bankers’ Association also told us that “businesses are finding it easier to access bank borrowing and costs are falling”, but the Federation of Small Businesses obviously reports that “47% of small businesses believe credit is unaffordable”. What is your view?

Phil Orford

That is their members’ perception of affordability of finance. The reality is that it is no different in cost from what it was five or six years ago. Their bigger issue is probably that the banks are perceived to be making more margin on the loans that they lend, or the overdrafts that they give.

Rebecca Harris

We have been through a particularly benign period, and this looks much more frightening to some businesses than what they are used to.

Phil Orford

Absolutely. Our members, small business owners, our research says, are not experiencing the levels of growth that current GDP statistics are demonstrating. They are not growing at 3%. They are not even growing at 2.5%. Many are not growing at all. Many are still going backwards. The reality of what is happening out there in your constituencies is that businesses do not have the confidence to start to invest again. They do not have the incentive, either, to take on more debt and more risk.

Rebecca Harris

That slightly goes back to a point I was making before, in the previous session. In this country, we used to be quite used to being asked for security and collateral, and we have gone through a period where we are not used to being asked for that as businesses.

Phil Orford

No. I am sure in Brian’s esteemed career in business, he has been asked for security at some points, and so was I in my business career.

Mr Binley

We put our house on the line to start our first business.

Chair

What you said was very interesting, because banks justify their lack of provision to small businesses by saying that there is not the demand out there. From what you just said, that would seem to reinforce that particular line of argument. Do you think it is a fair comment?

Phil Orford

Within our membership, it is certainly a fair comment. They tend to be established businesses. We do not have many start‑ups. Therefore, they are probably realistically net depositors. They may still have some borrowings as well, but fundamentally they have got the security of some money in the bank. It might be a nuance within our membership. However, if you look at the BBA‑funded research, the quarterly SME Finance Monitor, it does indicate a continuing rise in businesses not seeking finance, and a continuing fall in lending. That is a fairly comprehensive report. I am not for a minute advocating that what the banks are saying is absolutely correct, because there is a huge amount that they could do. I am on the record already as saying the banks risk disabling recovery before it gets going. There is a huge amount more that they can do. It is difficult to argue against the evidence of quarterly research that has now been going for four years.

Mr Walker

I just want to follow up on that point, because we recognise the picture you are painting of businesses that are happy to sit on their cash. Should we necessarily think that that is a bad thing? We have seen, with previous recessions, when companies entered the recession with very high gearing, far higher levels of corporate bankruptcies and people being laid off than we did in the last recession. The last recession was much worse, but a lot of private businesses and public businesses went in with a lower level of gearing. We should not necessarily see it as a bad thing that people do not want to go out and borrow as much as they did during the credit boom.

Phil Orford

There are issues. Let’s be realistic. There are issues, and it might be a small percentage where there are those issues, and there might be issues within those businesses themselves that prevent them from reaching the finance they need. However, I do not think anybody in this room or this House could advocate that a credit-less growing economy would be very positive for the long‑term prosperity of the UK.

Mr Walker

Absolutely, and it is about striking the right balance. The other area I suppose is competition for the banks and where the banks are not providing the products that businesses want, there is now hopefully a better range of alternatives for businesses to go to. Do you think that is something that Government should be actively promoting perhaps more than schemes like Funding for Lending?

Phil Orford

Yes, absolutely. The alternative market is standing at something like £1.75 billion now, so it is significant growth on three years ago. It is still obviously way behind where the banks are. However, initiatives like RGF, for example, which has funded some of the asset finances to match-fund asset purchases, are very positive. Yes, we are very keen to see Government continuing with those initiatives.

Mr Walker

Talking of Funding for Lending and that side of things, it is obviously very difficult to objectively measure what a scheme like that is doing when we do not have the control. We do not know what the alternative would be, and what would be going on without it. Do you have a view as to how much difference a scheme like that is making to your members?

Phil Orford

Funding for Lending has primarily made a difference on cost. EFG, which is still with us, of course, certainly had its place in the last four or five years. That is probably less so the case now, but it still has its market. They are success stories, but probably not on the scale we would have all liked.

Chair

Thank you. Your responses have been commendably concise.

Phil Orford

Can I please have one more minute? May I?

Chair

Yes, we have time if you want to make a point, Phil.

Phil Orford

It is specifically on exports, if I may, because I know it was a subject before. I talked earlier about current initiatives, particularly around start-up businesses. We have got to accept that start‑up businesses in a home market environment are not going to create wealth for this country. We have to look at international markets. This is a bit of an appeal, Chair. We have been lobbying BIS and Treasury about the formation of what we are calling an export tax credit. It is based upon the research and development tax credit system, with which a number of you, I am sure, will be familiar. It is a highly successful credit that has created innovation and development of technologies that are now creating great wealth for the country. We believe that if businesses are going to be incentivised, and we really believe that they need to incentivised to take more risk in overseas markets, the best way to do it is to apply a tax credit against investment made or additional revenue through export markets. We are getting some traction, but not what we would like. We are told that the issue is dead weight. My belief is: why worry about the dead weight if it creates significant export growth, aligned to the sort of targets that the Government is talking about by 2020? We are not just going to achieve that by UKTI or UK Export Finance. Business owners need something to incentivise them to get out there and get new business in overseas markets. A tax credit seems the logical way to do that.

Chair

Right. Could you send us some more information on that?

Phil Orford

I will. We have a paper on it.

Chair

We may well come back with some further questions on it, but thank you very much.

Rebecca Harris

Ahead of the Autumn Statement.

Mr Walker

Yes, good timing.

Phil Orford

It is in our manifesto for the Autumn Statement.

Chair

Kevin, do you wish to say anything? We have got one minute.

Dr Farnsworth

Only that these kinds of initiatives are really important, but obviously they need to be paid for as well. Again, that is why it is important that we look at the other side of this, which is tax, and tax benefits are important within that, too.

Mr Binley

Can I ask, Kevin, if you might consider the concept of a corporate welfare audit, in the way that we discussed?

Dr Farnsworth

I would, absolutely. That is what I have been working on.

Mr Binley

You do not call it that, then. I have just given you a title.

Dr Farnsworth

It is already in draft form, and that is pretty much what it is called. As I said, I agree with your point. I think it is really important.

Chair

Thank you very much. That is very helpful indeed. Again, we highlighted a number of issues. If you could provide us further information, I would be very grateful. We have been constrained with time, but there are several issues that you raised that we want to have a further look at. Thank you very much. It has been very helpful indeed. Oral evidence: Government Support for Business, HC 770-i 21