An end to `boom and bust' is the vital business ingredient

INDUSTRY VIEW

Sitting a few years ago as a fly on the wall in the office of a small firm struggling for survival, the cause of the danger to the company and its staff was plain to see.

Forget government red tape, late payment by suppliers and all the rest of the problems that John Major and Tony Blair have been chewing over in public for the last 10 days in their attempts to win the small business vote. What was really driving the firm to the brink was horribly simple.

It had expanded to keep up with demand during the boom years and was now being crucified in an unexpectedly severe recession, which had its customers diving for cover and cancelling their orders.

The result was cutbacks, redundancies and a soaring debt to the bank, which agreed to continue the overdraft only after an enormous squabble over the assets which the bank held as security.

Hundreds of thousands of small firms went through this searing experience during and after the last recession, with closures exceeding start-ups by nearly half a million between 1991 and 1993.

Some of the afflicted firms had seen much the same happen 10 years earlier. Unlike the most recent incident, which hit hardest in the service industries and property, that first episode was devastating for small manufacturers, and a whole generation was wiped out.

The two recessions together did more damage to Britain's entrepreneurs than the myriad of financial and other obstacles to small business growth that have been identified in a succession of worthy tomes going back 66 years to the Macmillan report in 1930. (This discovered a shortage of finance for small firms known as the "equity gap," and led to the establishment after the war of the Industrial and Commercial Finance Corporation - now known as 3i.)

The roller-coaster UK economy has almost certainly distorted the way small businesses behave, encouraged entrepreneurs into property rather than manufacturing and services and damaged investment and growth. It is no surprise, only three years after the tail end of the last recession, that the impact is still clearly visible on the behaviour of entrepreneurs.

A survey published on Monday by Binder Hamlyn of 3,000 small firms painted a particularly depressing picture. It emerged that the main constraint on expansion was not the raft of complaints about red tape and the rest, but the unwillingness of owner-managers to put up with the pain and hard work involved in rapid growth.

An Anglo-German survey of 3,500 firms which was released on Wednesday by the universities of Belfast and Strathclyde found that small firms in the UK had a significantly worse record for introducing new products than those in Germany and Ireland.

A related symptom is that entrepreneurs continue to worry rather more about how to get their wealth out of their companies than about reinvesting it, which is a perfectly rational response to uncertainty about the future.

Capital gains, inheritance tax and the low level of investment incentives are claimed to be a disincentive to the growth of small businesses, and both John Major and Tony Blair have promised to look at the tax regime in their attempts to curry favour with the small business lobby. But this is in reality a side issue now that the top marginal rates on inheritance, income and capital gains are down to 40 per cent.

That said, there is still much that can be done to improve the services available to small firms from the Government, the banking and the venture capital industry. But there are no simple recipes, which is why the competition between John Major and Tony Blair to court the small firms vote has proven so sterile.

The most curious aspect of Mr Blair's policy for small business, announced in a speech in the City on Wednesday, is how much it overlaps with that developed by Michael Heseltine, when President of the Board of Trade, and continued by Ian Lang, his successor.

Each side has even taken to claiming the other is pinching its best ideas. It was Labour, for example, that first suggested a national network of Business Links to supply one-stop advice services to small firms.

Mr Blair could hardly have used his key policy speech on Wednesday to deliver anything other than a promise to improve the network once he gets into power. It will be a centrepiece of his small firms policy.

With so much consensus hidden behind the political mudslinging, it has become desperately hard for Labour to make a distinctive contribution to the debate.

Plans from the last manifesto for a state-owned small business bank have been dropped as impractical, and replaced with an offer of financial advice, offered through Business Links, and a pooled insurance scheme for venture capitalists.

Both sides say they will review the small firms loan guarantee scheme, cut red tape, improve insolvency procedures and use the Internet to offer advice on exports. When it comes to shopping lists like these, the small firms lobbies are pushing at an open door now that they have both the main parties chasing the votes of entrepreneurs.

How on earth, the policymakers must have asked themselves, can Tony get a headline that would differentiate the Labour product from the Government's?

The answer must have come in a flash when John Major - in a speech 10 days ago - poured cold water on the idea of legislation for statutory interest payments on overdue debts. Mr Blair seized on this, undeterred by the fact that all but one of the main business lobbying organisations now believe that statutory interest would cause more problems than it solves.

Late payment of debts is worth tackling, even if the best that can be achieved in practice is to embarrass firms into complying by forcing publication of their payment records, a proposal that both Mr Blair and Mr Major happen to agree about. But as a way of transforming the lot of Britain's small firms, the late payment issue may prove as much a red herring as the attempt three years ago to blame all the problems of entrepreneurs on the banks.

Labour's most significant policy development for small firms has nothing to do with late payments, venture capital insurance, or reform of education and training.

The really important issue for small firms is whether Mr Blair can deliver Labour's new commitment to a stable economy, free of the two devastating booms and busts that plagued Lady Thatcher's reign and destroyed the businesses of so many of her natural supporters.