Government must do more for SMEs

Irish Farmers Journal

December 2011

There are over 8,000 fewer small business operating in Ireland today compared with 2007, with the loss of 105,000 associated jobs. There are almost 200,000 small business operating in Ireland (employing fewer than 50 people) which employ 655,000 people. This accounts for half the private sector workforce.

Many small and medium-sized businesses (SMEs) are struggling just to survive these recessionary times and the facts are, initiatives this Government has recently proposed (e.g. employers paying for employees' sick leave) look set to exacerbate this reality for many businesses.

This Government's first economic priority must be to support and sustain the existing private sector jobs.

These companies and the jobs they provide pay the taxes which, in turn, enable our Government to pay teachers, nurses, gardai¨, judges, etc.

Currently, average public sector pay is running at close on 33% higher than average private sector pay.

Unless this Government gets real in terms of tackling public sector pay, numbers and pensions, and also reforms our social welfare system (both of which account for over 70% total Government spending each year), the downward trajectory for many small and medium-sized business will continue as the burden they will be forced to carry by the state will continually increase.

Ireland's SMEs

• SMEs account for an estimated 53% of total employment in Ireland (Q3 2010);
• more than 99% of all European business are SMEs;
• at least 85% of total Irish exports are from foreign-owned companies;
• 60% of Ireland's total exports are currently to EU countries, with 13% to the Britain alone;
• in 2008, 2,800 people set up new businesses per month, but this has fallen by 71% to 800 per month in 2010;
• Ireland's food and drinks sector accounts for two-thirds of all exports by indigenous industry, exporting produce to over 120 countries;
• best estimates are that (direct and indirectly) 230,000 people's jobs are linked to the food and drinks sector in Ireland;
• Ireland's food and drinks sector is the largest wealth generator in Irish manufacturing, when account is taken for capital flow and the multiplier effect into the 'local' domestic economy;
• most of the raw materials for Ireland's food and drinks sector are produced and processed in Ireland;
• as Ireland's food and drinks industry is headquartered here, it is affected more than any other industry by the business, regulatory and policy framework in Ireland; and
• this sector accounts for gross output of almost €24bn annually, of which almost €9bn is exported each year.

Multi-nationals

Successive Irish governments have been very focused on attracting Foreign Direct Investment (FDI) which, to be fair, has yielded excellent results for Ireland. However, international experience shows, the vibrancy and well being of a country's SME sector, is the ultimate barometer for a country's long-term economic future.

Germany is the best example of this very fact. In Germany, it is the SME sector that is widely credited with ensuring the resilience of the German economy. This sector is known as the Mittelstand in Germany, and a special report by Business Week magazine, highlights just how important this sector is to the Germany economy.

The German SME sector comprises over three million enterprises, employs over 70% of German workers and accounts for approximately 50% of German GDP.

The key elements behind the success of the SME sector in Germany, are:

• financial prudence;
• engineering spirit;
• long-standing internationalisation; and
• retention of highly skilled workers. Retention of staff can be difficult for many SMEs in Ireland due to competition from large foreign-owned companies in Ireland.

In summary, the ongoing success of SMEs in Germany comes down to their focus on exports and highly advanced market niches. There is evidence to suggest, Ireland's over reliance on FDI has been to the determinant of the SME sector in some instances.

Problems & solutions

I recently met up with the president of the Irish Tax Institute, Bernard Doherty, to get his views and recommendations.

Doherty succinctly put the current situation in perspective: ''Since 2008, ongoing Government policies have made it increasingly expensive to conduct business in this country and, most importantly, to employ staff.

''For example, the marginal income tax rate for the self-employed has increased from 46.5% in 2008 to 55% in 2011. In addition, reduced reliefs, increased personal taxes by reducing bands, interest relief for investing in trades etc, is continuously making it more difficult for our SME sector to retain their existing jobs, not to mind creating new jobs.''

The Irish Tax Institute recently presented their recommendations to Government, which would help our struggling SME sector which is so vital to our economic recovery. These include:

• tax certainty: more than any one individual tax issue, this was the overwhelming concern held by Irish businesses which they surveyed, where they could operate under a definitive tax strategy for the next three to five years. This would help allay fears of investors, businesses and job creators;
• specific tax proposal to encourage and facilitate international sales and marketing: this relates to a new simple tax measure, which our Government could introduce in the upcoming budget, to further support Irish companies sending employees to travel abroad to drive exports. Similar in nature to the current R&D tax credit, this measure would provide targeted tax relief for sales and marketing costs for export focused companies;
• tax measures to drive invention and innovation: this would require a new volume based R&D scheme to match those in competing economies. This would also involve a more simplified R&D regime to encourage Irish companies to participate in the current scheme, (only 18% of companies claim the current R&D credit in Ireland);
• a better tax system for developing and commercialising intellectual property; and
• a tax measure to retain highly talented employees, who are leading innovation within Irish companies to remain in Ireland.