Hammond’s Productivity Plan – what’s in it for small firms?

When Philip Hammond, the Chancellor, stood up to present the Autumn Statement he had a problem and a plan. The problem combined the hit on growth from Brexit, stubbornly low productivity and stretched public finances. The plan focuses on investing to boost productivity. So where do small firms fit in?

Well – unlike many recent government statements – there was little direct mention of smaller companies. Many of the announcements made by Hammond have important, or at least potentially important, implications for smaller companies, however.

Let’s start with Brexit. For the first time in the Autumn Statement we got the OBR – Office of Budget Responsibility – view on the costs of Brexit. At a national level the numbers are hard to grasp – £58bn – but the hit in terms of growth – estimated at 2.4 per cent is more tangible. Essentially, the OBR estimate we lose a year of growth. Not only that of course but we have a government which is distracted by the Brexit negotiations and all that follows for perhaps 5 years to come.

The scale of negotiating Brexit was brought home to me recently when a French civil servant said that we needed to re-negotiate 80,000 pages of agreements across industry, trade, employment etc.

For the 1:4 small firms which export to Europe this all creates considerable uncertainty. For all small firms, the Brexit hit on growth the OBR are envisaging means slower demand growth in the future.

So this is the context for Philip Hammond’s Productivity Plan. The Plan has three main elements: invest more in innovation, invest in infrastructure and finance a Productivity Council. Hammond says the aim of the Productivity Plan is a ‘high-wage, high-skill economy that will deliver higher living standards’ and small firms have a stake in each element of the plan.

On innovation, Hammond announced an increase in public spending on innovation of £2bn by 2020. This is new money and a massive increase in our national commitment to supporting leading edge science and new product and service development. Few details have emerged so far about how this will be delivered but much of the money is likely to be used to drive targeted investments in key industries – automotive, aerospace, life-sciences – or emerging technologies. Other money may be channelled through Innovate UK with a focus on specific ‘challenges’ or to support strong innovation projects.  Both create opportunities for technologically advanced smaller firms, particularly university spin-outs or firms partnering with universities.

Less clear is whether any of this new money will be used to support more broadly based innovation and productivity improvement among the majority of less technologically advanced small companies in the UK. For these firms, innovation in new software, web technology, e-commerce and related skills may be key to improving productivity.

The second element of Phillip Hammond’s productivity plan is around infrastructure. This is where the bulk of the new £23bn Productivity Investment Fund is going to be spent. This means new public contracts creating procurement opportunities for the construction, engineering and related sectors. How will small firms fare in accessing these opportunities? The problems here are well-known with smaller firms often finding it difficult to tender successfully for public contracts. Do we need to learn some lessons from the US here where there are legally binding quotas for the proportion of contracts which are awarded to small firms? Indeed, they go further and have quotas for women-owned firms and those run by ethnic minorities and former members of the services. Is this something we should emulate?

The final element of Philip Hamilton’s Productivity Plan is the new Productivity Council. Led by a group of major business leaders this initiative has been developing in the background for some months and has big plans for the future. Phil Smith – one of the leaders of the initiative – talked about the Council’s plans recently at the Enterprise Research Centre’s State of Small Business Britain Conference. He talked about the aim of the Council to create a productivity ‘movement’, to put raising productivity on the agenda of every company board.

More practically, the Council aims to develop a range of apps backed up by extensive databases which allow firms to benchmark their productivity against that of similar firms. These ‘How good is your business?’ apps will then help firms to develop strategies to improve productivity and identify possible sources of support. For small firms the ‘How good is your business?’ apps will offer a new real-time business diagnostic and the potential to measure improvement. The Productivity Council’s proposed apps offer some real innovation and new insights for small business owners. How strong the take up will be, however, only time will tell.

Philip Hammond’s Productivity Plan has some very positive elements – the UK’s businesses small and large need more innovation and better infrastructure. The missing component, largely outside the government’s control, is business investment in new equipment, training and other intangibles such as R&D and design. Here too the Chancellor was trying to help by providing a clear future for corporation tax rates, confirming the government’s intention to reduce rates to 17 per cent. Lower profit tax rates strengthen the incentives for investment but whether this is enough to overcome current uncertainties remains unclear.

Small businesses were not central to this year’s Autumn Statement but they do have a key role to play if the UK is to raise its productivity. Indeed there is some recent evidence to suggest that compared to larger firms the UK’s small firms have performed very strongly in recent years in terms of productivity. This needs to continue if Philip Hammond’s productivity plan is going to succeed. The challenge for government is to ensure that small firms are able to access the opportunities created by the promised new investments.

Author : Stephen Roper  Director of the Enterprise Research Centre, 

Please note that the views expressed in this blog belong to the individual blogger  and do not represent the official view of the Enterprise Research Centre, its Funders or Advisory Group.