Economics: A good start is half the work, so the old Irish saying goes. This week's report of the Small Business Forum is a very good start in proving that small businesses are indispensable to our economy. But it will have little more than information value unless the following axiom is acted on by government: Big government is bad for small business. And small government - local authorities - is not much better.
In general, the average size of a country's business sector tends to reflect the size of the country, and hence its market. It's no accident that the US has the world's biggest corporations (and it's a safe prediction that this will some day be China). For a smallish island like Ireland, keeping an eye on the small business sector makes strategic sense.
But does the period examined in the report - 1995 to 2005 - give a deceptively good picture of how small firms are faring. And do its recommendations go far enough?
The Forum was set up by Minister for Enterprise, Trade and Employment Mícheál Martin in July of last year and told to report back a year later on how small business is doing and how Government can help them. Consultants DKM - commissioned by the forum to answer the first question - found that the sector grew strongly between 1995 and 2005. The forum itself, chaired by Microsoft Ireland managing director Joe Macri and composed of six other business people, two academics and three Government representatives, came up with the policy recommendations contained in the report Small Business is Big Business.
One of the first messages to jump out of the DKM report is the crucial role of small business in supporting job creation. By 2005 there were 250,000 businesses in Ireland employing fewer than 50 people and the vast bulk of these - some 70 per cent - were sole traders. Employment in the sector grew to 770,000 and, by 2005, accounted for almost one in every two non-agricultural private sector workers. Much of our economy's employment, then, is in fragile entities that are more exposed to changes in the economy.
A second message is growing dependence of the economy on the construction sector. Two out of every five new small businesses created were in construction, which now provides one in every four small business employees.
Not only do construction firms dominate the small business sector, the reverse is also true. Over two-thirds of construction sector gross value added - a measure of the contribution of a sector to the economy - comes from small businesses. That compares with 40 per cent for the services sector and about one-third in industry.
A third message is that the best of the growth appears to be over. Between 1995 and 2000 the number of small business rose by 60,000 - from 160,000 to 220,000. Over the following five years the increase was just half of that, from 220,000 to 250,000.
The most worrying finding of the report is that growth in industrial small firms ground to a halt over the second period. And this is where its policy prescriptions come in.
The first problem faced by small business is regulation. Presenting the forum report, Joe Macri cited findings from the UK which shows that - in employee terms - the costs of regulation in small businesses are 60 per cent higher than in larger businesses. This is due to simple economies of scale.
The regulatory burden has a fixed component, which does not change regardless of firm size - and a variable component, which does. The former is inescapable. Larger firms can spread its costs over many employees, but for small ones it can be a millstone. The report calls on Government to review the regulatory burden every seven years.
The second problem is taxation. In spite of accounting for 97 per cent of enterprises, small businesses account for only 11 per cent of corporation tax. No cause for whinging here. But they also pay 37 per cent of income tax.
And, as far as data are available, of the scandalous total of €8 billion paid in service sector VAT in 2003, some €4 billion was paid by small businesses - almost as much as the €4.8 billion received by the Government in total corporation tax receipts.
The Government is already committed to implementing the report's call to increase the turnover threshold for audit exemption fivefold from €1.5 million up to the EU approved level of €7.3 million.
The report also urges the Government to raise the thresholds for VAT. In fairness to the Government, Brian Cowen raised VAT thresholds last year. The report urges that they rise further: to €35,000 from €27,500 for services and to €70,000 from €55,000 for goods.
The Institute of Chartered Accountants in Ireland is right about two aspects of the report's findings. The changes proposed to VAT thresholds are insufficient to compensate for the significant increases in business costs and turnover levels in recent years.
Only permanently indexing these thresholds to inflation can fireproof small business from future stealth taxation. Neither is a seven-year review period sufficient to stem a veritable flood of regulation in which many small businesses are drowning.
And, as if big government wasn't enough to worry about, small businesses have to contend with small government as well. Leaving aside the question of whether we need half as many local authorities as we have, the report found that the finances levied to run them fall disproportionately on the smallest businesses.
Development charges for instance - charges to facilitate the development by local authorities of roads, water supply and sewerage - are largely necessitated by residential development. Those charges rose by 43 per cent in just one year, between 2002 and 2003, the report found.
Small businesses bear the cost of this, despite benefiting little from what local authorities do.
The report proposes to bring in more proportionality and balance in local authority charges. Along with its idea of setting up a business users' forum to give representation for businesses on the local authorities whose activities they pay for, this should become a Government priority.
The technical proposals in the report are a welcome and useful start to helping small business. They are attainable and useful. But in the long run, they are not enough, The findings of this report must now drive Government policy on electricity, transport, telecommunications and - above all - the reform of local authority structures and financing.
Small businesses are the plucky heroes of the Celtic Tiger. It's time the Government got off their back.
