Entrepreneurs are a false god. We offer them billions of pounds’ worth of tax breaks and subsidies, and a lot of goodwill, when research suggests that most, after pocketing the cash, will do little to help UK plc prosper.
Academic studies have found that small business owners, while being a significant slice of the economy and a source of employment, are very rarely the spur for innovation or increases in productivity, let alone the wellbeing of the workers under their employ (health and safety is worse in small businesses).
If you want innovation and creativity, big companies with expertise to spare are a better bet – or the kind of startups that thrive, like arm’s-length subsidiaries, shielded by the umbrella of a university or private equity firm.
These are companies worthy of targeted state support. On the other hand, the idea of the entrepreneur as wealth generator par excellence is at best unproven and at worst entirely misplaced.
It is important to pay attention to the academic literature, because entrepreneurship underpins the neoliberal narrative that has dominated politics for the past 40 years and still forms the bedrock of mainstream economic thought. Without any supporting empirical evidence, this belief has meant almost every entrepreneur getting a handout in the desperate hope that they might build a Microsoft or Amazon.
At the start of 2023 there were 1.4m small businesses (those with 1 to 49 employees) and 36,900 medium-sized businesses in the UK (those with 50 to 249 employees). Last month, the National Audit Office (NAO) identified 39 reliefs aimed at increasing business investment. The bill for 29 – most of them aimed at small and medium-sized businesses (SMEs) – was estimated at £16.6bn.
What bang did the government get for its buck? The NAO said: “The Treasury and HMRC do not monitor or evaluate reliefs closely enough to understand if they cost too much or achieve their intended economic impacts.”
Entrepreneurs’ relief costs about £3bn a year, and aims to encourage people to start or join growing companies, by lowering the rate of capital gains tax they pay when selling the company. A review in 2019 by Adam Corlett at the Resolution Foundation came to a similar conclusion as the NAO: it is possible to see that 52,000 people claimed the relief in 2015-16, with an average gain of £75,000 per person, but not whether their businesses were hi-tech startups or restaurant chains.
Other tax reliefs for business are available, enterprise zones among them, where there is almost no understanding of the benefit of such colossally expensive state gifts.
Paul Nightingale, a professor of strategy at Sussex University, says the UK is not alone. Most governments have failed to provide a rigorous analysis of the impact that SMEs have on economic productivity and growth.