Hamish McRae: ‘Independent businesses will create most of the net jobs in the next five years’

Analysis

It should have come as no surprise to us that Independent readership among entrepreneurs is exceptionally strong. Still it is gratifying that this newspaper has a much higher proportion of its readers running or managing small and medium enterprises than other papers.

We suspected we had strong support among entrepreneurs – and we like the phrase “independent businesses” to describe SMEs – but it is good to have that confirmed. It has set us thinking about the nature of entrepreneurship in Britain, and the contribution it will make to the economic recovery. The starting point is that a recession creates opportunities for the nimble. It is not just that some weaker competitors have failed, creating openings; it is that all sorts of assets, from property to qualified staff, are freely available and at an attractive cost.

Even finance is often available, for though the conventional avenues of the banks may be clogged, the very low deposit rates paid by the banks has encouraged those with cash to seek out alternative outlets. As a result, the informal networks of providers of finance have taken up some of the territory abandoned by the banks. If it is a good time to start a business, or at least as good as any, is it a good time to be running one? The Government’s rhetoric has been favourable towards the independent business sector, even if the tax and regulatory policies have been less so. With a probable change in Government next year, the generally favourable climate should be maintained.

There is a powerful reason for this political support. It is that much, maybe all, of the net job creation over the next five years will come from independent businesses. The state will be downsized radically, whoever wins the next election, because there will not be the revenues to support the present level of staffing in the public sector. So all the new jobs will have to come from the private sector. But large businesses are unlikely to increase their level of employment to any extent, given their experience of the past two years. The best that can be hoped for there will be that they re-employ some of those they have laid off. So the onus will be on smaller businesses to take on more people, and on self-employment.

The self-employed are an interesting group, for self-employment has climbed through the recession. That may be partly a function of larger employers scaling down their staff but still needing to get the jobs done. So people are laid off, set up on their own, but then pick up consultancy jobs in the same field. It may be partly a tax effect, for the higher tax rates on employees encourages people to hire themselves: they can then decide how much to take out of their own business in salary and how much to leave in it for the future. Proposed steps by the Conservatives to reduce or even eliminate national insurance contributions for new businesses will encourage this trend.

Many new businesses will be in activities that do not exist now. But as a rule, expect more of the same. Most new businesses will be in the service industries and most will be in London, the Southeast and East Anglia. Many will be “virtual” ones – legal entities with an address but without any specific place of work. The explanation is that more than 10 per cent of employment comes from tele-workers – people who work on-line from home or from a variety of locations using home as a base. That is rising each year by about 0.5 per cent of the workforce, and 70 per cent of those tele-workers are self-employed.

From the perspective of a newspaper, this is exciting. We are in an “old” industry in the sense that we produce a physical product. But we are in a new one in the sense we are developing and marshalling information and making that available online. We look forward to serving the growing independent business community – one which fits so closely with our own history and aspirations.