It’s been an extraordinarily challenging few years for the UK’s businesses, not to mention its people. At the heart of this tempestuous time is COVID-19, the pandemic that swept the world, wreaking unprecedented human and financial damage, and triggering the largest economic contraction in more than 300 years of British history.
SMEs still reeling from COVID
The virus has had a profound impact on businesses, especially SMEs. Nowhere is this disruption more evident than in the record-breaking rise in private sector debt, shipped primarily by companies seeking to offset plummeting revenues.
Companies are making a good fist of paying back their loans now the economy has reopened. SME debt fell £1.4 billion in September, according to the Bank of England’s latest Money and Credit report–the largest decrease in net small business borrowing ever recorded.
But it’s not all blue skies and birdsong yet. According to another central bank report, Financial Stability in Focus, the surge in small business debt has likely given rise to a swathe of ‘vulnerable companies’, which are poorly equipped to handle further disruption.
This troubling conclusion was underscored by a recent analysis conducted by Begbies Traynor, which found that in Q3 2021, more than 560,000 businesses were showing signs of significant financial distress.
The corporate rescue and recovery practice also found that the number of county court judgements against businesses has increased 139% year-over-year, signalling that creditors have become more aggressive in chasing debts.
Fresh Disruption on the cards
Alas, further disruption is precisely what is on the menu. This time, the cause is a dastardly mixture of rising inflation, skills shortages, supply chain issues, and, of course, the lingering aftermath of the pandemic.
Unless these issues are reversed quickly, we will lose another wave of promising startups and the tens of thousands of jobs they sustain.
From the companies that can weather these turbulent conditions, but are once again taken to the brink of oblivion, we should expect little more than a cautious, preservationist attitude.
Non-critical projects will be mothballed or culled altogether in the name of survival and debt-servicing. Research and development could be first on the chopping block.
The long-term damage to innovation
It will surprise no one that I am a proud and vocal advocate for the importance of R&D.
Innovation is an investment in long-term competitiveness and prosperity. To tread water is to drown in the wakes of more ambitious peers. And yet, these blustering headwinds will leave countless businesses little alternative but to batten down the hatches and hold out for calmer skies.
The long-term consequences of this consolidation on Britain’s innovation ecosystem could be enormous. Smaller businesses are a key driver of new solutions and technologies. Their need to outwit wealthier incumbents fosters inventions and solutions that filter through the business world. Without them, the economy will be parched of new ideas.
These disruptions, and their zombifying effect on promising enterprises, will also harm the government’s ambitious hopes of raising nationwide R&D investment from 1.7% to 2.4% of GDP by 2027. And it’s equally-amiable goal of increasing public spending on innovation to 1.1% of the annual budget by the end of this parliament.
The reason is that startups and scaleups are huge sources of research and development spending. Indeed, according to HMRC’s latest R&D Tax Credits statistics, micro, small and medium-sized companies account for more than 40% of the total research and development investment used to claim R&D Tax Relief.
That’s £20 billion worth of wages, raw materials and prototypes the government cannot afford to surrender.
The case for government intervention
Even in aggregate, these crises will not prove as disruptive as the pandemic. Still, with the worldwide economy recovering and the complexities of Brexit continuing to coalesce, I worry that these disruptions will be with us for some time to come. How big an impact they have is up to the government.
While I am neither an economist nor a political consultant, it seems to me these issues have a number of possible solutions. For one, building an immigration system that is more attuned to the needs of businesses and more effective at attracting scarce categories of talent.
In the wake of Brexit, the government established an Office for Talent that would recruit high-skilled workers from overseas and launching a fast-track visa scheme for scientists, researchers and mathematicians. These were both sensible decisions.
The government could create a similar but more dynamic operation trained on skilled and unskilled roles for which domestic workers cannot be recruited or trained in a reasonable timeframe.
This operation would not need to be wholly reactive. Many industries – farming, for example – know well in advance when they’ll need additional labour. Working with the business community and planning ahead would surely mitigate some of the more problematic shortages, stimulating a more investment-friendly environment.
Winter is coming
Whatever the solution, the government needs to field these disruptions with the same fervour and conscientiousness with which it approached business aid during the early days of the Coronavirus.
Boris Johnson, Rishi Sunak et al must remember – though I saw little evidence of this in the Autumn budget that it has – that while life is edging towards normality, many businesses are not out of the woods yet.
If the government wants these promising companies to participate in the high-skilled, technologically advanced economy it hopes to build, it must protect them now, and during the bitter winter ahead.