Why small business matters

Vicki Stylianou

The Institute of Public Accountants (IPA), jointly with Deakin University, has been developing the “Australian Small Business White Paper”.  The purpose of the white paper is to present policy options for Australia to deal with what we believe to be a looming economic crisis that has the potential to rival or even surpass the recession of the early 1990s.

After more than two decades of prosperity driven by booming prices for mineral exports, Australia now faces the real prospect of a sustained fall in living standards.A deteriorating federal budget and higher unemployment are obvious symptoms of this predicament.

But at the core of the nation’s economic problem is a failure to lift business productivity for much of the past 15 years – which is to say Australia’s businesses collectively are barely more efficient than they were at the start of this century

The mining boom, while it lasted, was an adequate cover for the economy’s failings. Now the boom appears to be over, Australia’s underlying economic vulnerabilities have been exposed and remedial action is needed.

It is clear lifting productivity in the small and medium-sized enterprise (SME) sectors will be critical to our chances of directing Australia into a new era of prosperity.

The challenge cannot be overstated. Prolonged stagnation in the productivity performance of SMEs is borne out in an alarming series of statistics and survey data from the Australian Bureau of Statistics. Among the survey findings are that:

  • Australian firms have been going backwards since 2007 on seven key indicators – product differentiation, profits, productivity, exporting, outsourcing, training and IT expenditure,
  • only one in seven businesses considers innovation is important,
  • only one in eight businesses has an international market presence, and,
  • many medium-sized, well-established firms with the potential to expand into international markets consider only the national market as their end goal.

A key objective of the white paper is to refocus away from discussion about the budget and towards the small business sector and how it can assist in lifting Australia’s national productivity.

Small business is a huge component of the economy, accounting for nearly half of private sector employment and one-third of private sector industry value added. It will be critical in helping to revitalise Australia’s productivity.

There is a large body of research and evidence indicating governments and small business need to focus on three key elements or pillars – human capital (people), financial capital (investment) and technological change (innovation) – to achieve the end goal of building a more productive and dynamic small business sector.

And to achieve the best outcomes the three pillars must work in combination. This requires a well-targeted and coordinated policy response from government.

The white paper makes a number of key policy recommendations focusing particularly on the key pillars required for a more productive and dynamic small business sector.

One of the recommendations focuses on education and training. To address the significant skills deficit in the Australian economy, governments (federal and state) need to immediately reform the education system to increase and improve the stock of knowledge-based workers available for employment.

Research shows one in six small businesses faces a skills deficiency and 391,000 businesses are constrained in their innovation efforts by a lack of skilled labour.

Another recommendation is for a loan guarantee scheme. To help increase the availability of much-needed affordable capital finance to the small business sector, the federal government should consider introducing a state-backed loan guarantee scheme.

Australia is one of the only countries in the developed world without such a scheme. the scheme would provide a limited state-backed guarantee to encourage banks and other commercial lenders to increase loan finance available to small business.

Our evidence suggests that, by international standards, the cost of debt for Australian small businesses is high and risk-adjusted lending is not the norm in Australia.

When appropriately designed and administered, loan guarantee programs can deliver value for taxpayers through increased employment, productivity, innovation and exporting.

Further recommendations focus on innovation, competition policy, deregulation, taxation reform and promoting the use of venture capital.

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