If employment is the top priority, why are SMEs getting squeezed?

Governments aren't the most logical of organisations at the best of times. When election season rolls around, any pretense at rationality gets firmly shoved down the list of important things.

One logical element that deserves a place in the government's calculus is the number of people in full time employment. Jobs, we are constantly told, are the central focus of the government.

And who creates jobs? Small businesses create jobs. SMEs are the largest providers of employment in Ireland. SMEs account for around three quarters of private sector employment in the state. There are about 185,000 businesses in Ireland. 99% of them are SMEs. SMEs produce about 30% of the country’s national output and employ more people than any other sector.

Overwhelmingly, the story of Ireland's employment recovery is the story of demand returning to Ireland's small businesses, which hire one or two more people, and each expand their businesses a little bit. The government's action plan for jobs, in very dangerous George Bush 'Mission Accomplished' territory at the moment thanks to the target of 100,000 jobs being met early, focuses many of its supports on SMEs.

What's been happening to employment? It's obvious the number has been increasing recently. One good way to measure the increase in employment is to benchmark it against the peak of employment here in 2007, when about 2.2 million people had jobs. Right now Irish employment is at about 89% of that 2007 peak. So still quite a long way to go, even if the trajectory is upward. But that’s only if we look at total employment, including public servants, construction workers, semi-state workers, and everyone else.

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If we just look at the category of ‘self employed with employees’, we see the employment numbers in that category are still, today, down 30% from their peak in the crisis. The employment numbers have been at that level since 2012 and have not budged, upward or downward. It’s important to note this category doesn’t cover all SMEs, but it is a good proxy. Despite this caveat, I think it is reasonable to assume Ireland’s SMEs, the drivers of any recovery we’re likely to see in employment, are still far below their peak in terms of the employment they could generate.

Why? One reason is the demand for their goods and services just isn’t there. Another reason is that many of the existing SMEs are either choked with legacy debt problems, unable to access credit on favourable terms to expand, or, probably worst of all, they are scared of getting any credit at all as they are not sure conditions have sufficiently improved. The Central Bank has, correctly, kept a close watch on developments in SME credit markets, but given that the trend in SMEs today is away from traditional sources of credit and towards alternative financing, you would have to question how much the Central Bank’s take on things represents reality on the ground, despite evidence that rejection rates are falling.

Interestingly 48% of those the Central Bank surveyed looked for credit just for working capital—that is, just to keep the lights on—rather than investment for expansion or new plant and equipment. Looking at the range of supports available from the government, many of them relate to credit and either accessing new credit or appealing bank decisions on credit. The focus on export-oriented businesses is also clear from the start. Nothing wrong with the government’s approach here, but from the point of view of just increasing employment, a chip shop is as good as a computer chip manufacturer.

And both jobs are crucially dependent on demand. Looking forward to the next budget, efforts to increase household disposable income, either through decreases in taxes, increases in spending or combinations of both, will be crucial. The Spring Statement divvies up the State’s bag of sweeties fairly well. €750 million sweeties to Fine Gael in tax cuts, and €750 million sweeties to Labour in expenditure increases. With the €300 million restoration of public sector pay coming from the expenditure side, and a large concession to the SME sector would be a harmonization of our income tax system which currently discriminates against risk takers. For example, allowing proprietary directors of new SMES to avail of the normal PAYE allowance, ensuring the USC disparity for SME owners, especially at lower levels of income, and expanding the employment incentive scheme, would be steps in the right direction.

A rational policy making system would put SMEs at the heart of a demand-driven recovery, but that’s not too likely in the near future. Despite this, jobs are going to come from SMEs, especially those supported by the system to do so. If I had to pick one policy to push in the upcoming budget struggle—sorry, negotiation—I would pick tax harmonisation at lower income levels. It’s only rational.