Why micro-businesses could be Britain’s economic future

 
Allister Heath
IF you want to see how Britain has changed since the 1970s, look no further than our attitudes to entrepreneurship. There were around 820,000 small firms in the UK in 1971, according to an official report chaired by John Bolton, an industrialist; one of Britain’s great problems at the time was the terribly small number of entrepreneurs and the fact that far too many people relied on larger firms for jobs.

By the turn of the century, according to official estimates, the total number of firms had surged to 3.5m. By 2008 this number had increased to 4.26m, as Lord Young’s report on micro-businesses out this morning highlights. The need for many people to go self-employed over the past five years explains why this number has now hit a record 4.8m, with a net rise of half a million small businesses since the start of the crisis.

The number of micro-businesses (with up to nine staff) is up 40 per cent since 2000; they account for 95.6 per cent of all businesses, employ 7.8m or 32 per cent of private sector workers, and generate 20 per cent of the private sector’s turnover. There are 10 per cent fewer firms with over 250 employees. It is tough working for oneself, either heading up a new venture or as a freelance. Real wages have slumped for employees, but even more so for the self-employed, many of whom have been forced into that position because their employee position has vanished, or because larger firms don’t want to deal with the red tape that having staff entails. Some of these folk would much rather work for an established company.

But the UK’s culture is also becoming increasingly entrepreneurial, with ever more people wanting to become their own boss, regardless of risk, preferring loose networks to rigid hierarchies and labour rights; the rise of this culture of independence, individualism and self-reliance is a genuinely exciting trend.

That said, while the gap between the UK and US has narrowed dramatically in recent decades on this key metric, it has further to go. Research from the Department for Business suggests that if Brits were as entrepreneurial as Americans we would have nearly 1m more firms.

There is another problem behind the seemingly good British statistics. Since 2000, the number of sole traders is up 51 per cent, the number of firms with one employee (on top of the founder) is down 12 per cent (and by much more since the peak), the number with 2-4 employees is up 20 per cent (but has barely risen since 2007) and that with 5-9 up 14 per cent. So while slightly larger firms have done relatively well, most of the growth has come from self-employment, and slightly larger small firms have suffered. Depressingly, of the 4.8m UK firms, 3.6m are sole traders without employees.

So while the UK has no trouble creating self-employment, which is why we are doing better on the jobs front than the often inflexible and unadaptable Eurozone, we remain bad at creating small firms that go on to grow, hire people and turn into larger ones, the so-called gazelles. We need to fix this problem, and fast.

ECONOMY IMPROVING
Nobody knows how long it will last, but the economic newsflow is continuing to improve. All five economic surveys this morning are positive, unprecedented in recent years. The CBI says growth is picking up; the CIPD sees further jobs growth; Lloyds’ regional PMIs are the strongest for eight months; BDO’s business trends reports booming confidence in services; and Barclaycard highlights that consumer spending is picking up. Let’s hope it isn’t a false dawn.

allister.heath@cityam.com
Follow me on Twitter: @allisterheath