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Can devolution boost small business growth?

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5th May 2016
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Today sees the country go to the polls in what many see as the most important national vote outside the general election.

While June’s EU referendum has inevitably generated more column inches, for those who own or work for small or medium enterprises (SMEs) if the government’s programme of devolution delivers on its promises it could trigger an shift greater than that claimed by both sides of the Brexit debate.

Prevailing attitudes

Even today the prevailing attitude among SMEs is that local government does not listen to the concerns of small business, and public sector contracts are only available to companies with the resources to bid for them.

To a certain extent the statistics bear this out. According to Lord Young’s 2015 enterprise report, although the public sector spends nearly a quarter of a trillion pounds each year on goods and services, in 2010 only 6.5% of the value of central government procurement spend went to SMEs.

While efforts have been made to rectify this in the past, most notably the recent failed local enterprise partnerships (LEPs) scheme, the current government are arguably seeking to go deeper than ever with their plan to devolve power to regions.

Deeper devolution plans

The devolution plan allows individual cities more control over public spending. Greater Manchester, for example, currently spends £5bn of public money every year, but will receive an additional £2bn to play with once devolution plans become law.

Cities will have more autonomy around housing, transport, planning and policing, and if the devolution plans rolled out this year are deemed successful then other cities such as Birmingham, Leeds or Hull could soon follow suit.

Increased localism doesn’t automatically lead to better outcomes."

Commenting on the programme John Allan, national chairman of the Federation of Small Businesses, stated: ‘‘The move to give cities greater power to shape their local economic environment is the right one. Local decision makers are best placed to understand local economic needs and if managed carefully, greater decentralisation has the potential to deliver the economic rebalancing which is so clearly needed.”

However, Allan also urged the government to learn from the lessons of setting up the LEPs. “Increased localism doesn’t automatically lead to better outcomes. This requires strong governance arrangements to ensure accountability, transparency and local small business engagement.’’

‘Metro mayors’

Directly elected mayors, as seen in London, Liverpool and Bristol, are also being rolled out across the country, with more likely to follow in new ‘enterprise zones’ in smaller towns and rural areas like Ipswich and Carlisle. This is all part of an overall £12 billion local growth fund.

The devolution deals and the introduction of elected mayors should be good news for all businesses."

Andrew Carter, deputy chief executive of think tank Centre for Cities told AccountingWEB that their research broadly supported this more devolved style of governance.

“The devolution deals and the introduction of elected mayors should be good news for all businesses. Some of the things they have control over, such as infrastructure or transport affect large and small businesses alike, and in many respects you could argue that small firms rely more on those sorts of services because they don't have the internal resources to deal with them themselves.

“In going through the election process, mayoral candidates are also going to have to set out their stall in a much clearer way they may have done in the past, so this will help explore precisely those issues.”

Chris Richards, senior business environment policy adviser at manufacturers’ organisation EEF, stated that its members were also broadly in support of the scheme, but urged the government to focus on getting in place a structure that will help decisions to stick.

“This isn't the first time we've talked about devolution. We've been here before in terms of what are some of the main issues of the plan are.

“We have come out in favour of 'metro mayors' in place like Manchester, Liverpool and the North East because hopefully that will help to stabilise decisions made. It is about trying to put in place a framework where business has that confidence aware these decisions aren't going to be overturned.”

Business rates

A key plank of the devolution plans allows councils to keep the rates they collect from business. A further power for local government to raise rates will also be granted, provided that councils agree to be overseen by a directly elected mayor.

Having to mind the performance of its business base is going to become ever more important for local government."

The additional revenue must also be spent on infrastructure, and be given approval by a majority of local businesses. These councils can then raise rates by 2p, so raising additional funds to invest in housing and transport.

Andrew Carter from Centre for Cities believes this is part of a broader shift, where local government becomes increasingly reliant on their business base, through the business rates system, for its income.

“Having to mind the performance of its business base is going to become ever more important for local government, who need the money to spend on public services. This will create incentives for local politicians to be more proactive in engaging with the business community than perhaps it has in the past.”

Although the FSB’s John Allan agrees with the principle of local areas retaining more of the rewards of success, he cautioned against allowing local variation in business rates, stating there is a “big risk this would fragment the tax system’’.

Hampshire Trust Bank’s CEO Mark Sismey-Durrant agrees. Commenting on the issue, he stated that the plans provide “an opportunity to create thriving local environments that could help stimulate business growth”, but warned that the approach taken may vary from region to region, meaning that “some SMEs may benefit more than others.”

Do you live in an area that has been or is likely to be affected by the government’s devolution plans? Do you think they will help small businesses grow?

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