Colin Borland: We need a Scottish Budget for small firms

And we’ve seen some industrial level expectation management around next week’s Scottish Government Budget.

We’re informed of emergency Cabinet meetings and £1 billion black holes. There are some big commitments, like strike-breaking public sector pay deals and council tax freezes, to be paid for. There’s talk about another new income tax band.

So the ground is clearly being laid for what, however you cut it, is going to be a tricky announcement. All the more vital, then, that the choices minsters make are the right ones.

Government, of course, is always about picking priorities. We know, for example, that if you want to pay your staff higher wages, but don’t have any more income, you need to find ongoing, permanent savings elsewhere or employ fewer staff.

But I’ll come on to some of the tougher trade-offs government will need to make presently. First, let’s look at some things Scottish ministers could announce next week that would boost the economy – and hence the public finances – while costing nothing.

For a start, they can push, as small business owners do every day, to get the maximum value for money that they’re going to spend anyway.

The Scottish public sector spends about £15 billion buying goods and services every year. We know that spending with local small businesses is good for economies and jobs. Money that’s spent local stays local and its effects are multiplied as it moves around the local economy. We also know that strong local economies are a prerequisite of strong local communities.

But, if you look at the figures for 2019/20, the latest year for which a full breakdown is available, you see that, of the £11.7 billion-worth of public sector spend for which the size of the supplier is known, under 18% went to small and micro businesses. This is despite them accounting for 98% of the business population in Scotland.

When you look at micro businesses – those with fewer than ten employees – the numbers are even more stark: 93% of all businesses, winning under 5% of government business. For comparison, if you look back to 2016/17, you see that, of the £11.6bn public sector procurement spend that year, approximately 7% went direct to micros and 14% to small businesses.

So, it seems procurement reforms thus have far not moved the dial. Indeed, if anything, they’ve turned it the wrong way. The Budget statement could therefore commit ministers to using the forthcoming Community Wealth Building legislation to introduce statutory targets to increase public sector bodies’ – and other publicly funded anchor institutions’ – spend with smaller local firms.

Similarly, we could redirect more of the Scottish National Investment Bank’s annual investment budget to small and micro businesses. Our submission to the Scottish Government ahead of the Budget suggests a target of 20%, with particular emphasis on lending to those businesses led by women, disabled and ethnic minority entrepreneurs, where we know there’s huge potential, but also that they are less likely to seek or secure external funding.

Further, in some instances, doing nothing does genuinely cost nothing. So, the Budget offers an ideal opportunity to reaffirm the Government’s commitment to think long and hard before introducing any new business regulations on small firms, including assessing their cumulative impact. Decisions on regulations can have as much, sometimes more, real-world impact on businesses’ bottom lines as tax changes, so should merit attention at every fiscal event.

So far, so painless. But, even with cost-free growth-boosting measures like these, there’s no getting away from the fact that the Finance Secretary still has difficult decisions to make – and a key area will be around business taxation.

As we know, it was announced in the Autumn Statement that targeted 75% business rates reliefs for those in retail, leisure and hospitality in England would be extended for another year. We also know that the particular inflationary and other challenges these firms continue to face also apply north of the border. There’s therefore a strong case to bring back some form of similar sector-targeted reliefs – which were withdrawn in July 2022 – in Scotland.

Also, given that we’re still seeing the effects of the changes to thresholds for the small business bonus scheme washing through the system, it’s also important that no further tightening of criteria for this lifeline relief are imposed this time round.

Now, of course, letting businesses retain more of the revenue they generate isn’t the same as a cash hand-out. However, on a superficial level at least, the net effect looks roughly the same on a government balance sheet. And it remains the case that a cut or freeze in business taxation can (and will) be portrayed as “costing” the public purse.

But I say it’s a superficial take because a trading environment that makes it harder to do business will see the business population reduce, with all that entails. Anyone in any doubt about the precariousness of many firms need look no further than last week’s official Business in Scotland statistics, which reveal that we’ve lost over 20,000 small businesses in Scotland in the last year. That, for comparison, is the same as we lost during the Covid pandemic between 2020 and 2021.

I also know from discussions I’m having, that, without some breathing space on the horizon, many businesses fear they’re running out of road. Margins have gone, customer spending is down, reserves are exhausted.

Despite everything that’s been thrown at them, though, Scotland’s small businesses still employ over 900,000 people and produce 28% of Scotland’s turnover. So you can see how much is at stake and why it’s so important that the economy and growth is put front and centre of this Budget.

Without our small businesses doing all they do for communities, economies and the public purse, the Budget sums are just going to get harder and harder.

Colin Borland is director of devolved nations for the Federation of Small Businesses