There are many things that Ireland does well from a business perspective. We rank high internationally for ease of setting up a business. Once established, our companies grow their employee numbers at the second-fastest rate in Europe.
Two thirds of Small Firms Association members consider the business environment to be improving and domestic economic growth is seen as the biggest opportunity for small businesses over the coming year.
Over the past year, businesses have benefitted from favourable interest rates, exchange rates, and low oil prices. The picture, however, is not all rosy. These influences are outside of our control and liable to change — they are economic sand castles that could be washed away with little notice.
We must not let them distract us from the underlying issues. Instead, the focus must be on building solid, long-lasting foundations for business to thrive. This involves addressing the concerns of the small business community, which encompasses 98% of companies in Ireland and employs half the private sector workforce.
The reality is the rate of new business formation in Ireland is low, and less than half of businesses are still operating five years after they are established. To tackle these fundamental weaknesses, as well as the barriers to small businesses growing, exporting and innovating, key changes to the business environment are needed.
The tax system for the self-employed is unattractive and prompts too many people to ask themselves, “Why bother?” Entrepreneurs are rational and the discrimination against the self-employed and proprietary directors is a serious deterrent. To redress the imbalance, three changes are needed: The self-employed income tax credit should be brought up to the same level as the employee tax credit; the USC self-employed surcharge must be abolished; and a voluntary PRSI system should be introduced to provide a safety net for business owners.
The capital gains tax regime is also in need of an overhaul to boost investment. A 10% entrepreneurial rate would encourage business owners who sell their business to invest in another company.
The SFA has long called for the system to be brought into line with the UK, and this is even more important as competition for investment increases post-Brexit referendum. Practice over the last 20 years has shown that when the CGT rate drops, revenue increases due to a surge in activity, so this is a clear win-win.
Wage inflation too is a major concern for small businesses. The increase in the minimum wage from January 1 is creating a ripple effect, with demands across all pay levels. This all at a time when Irish labour costs are already considerably higher compared to the UK and the EU average. If businesses are to be able to keep their employees on and create more jobs, wages must be linked to productivity and the profitability of the business.
As well as dealing with these immediate problems, reflection is needed on how to develop the small business sector over the next decade and beyond. The SFA has a vision of Ireland as the most vibrant small business community in the world — supporting entrepreneurship, valuing small business and rewarding risk takers.
Achieving this vision requires a shift in culture and a reorientation of enterprise policy across government. Neither is easy to achieve, but the potential rewards are huge in terms of: Creating jobs; adding value to the economy; contributing to the exchequer; regenerating towns and villages and strengthening communities.
A transformed sector would consign to the past the mindset that going into business is an unconventional career choice. Entrepreneurship should be valued and encouraged as a first choice career by parents and teachers. Equally, business failure where there is no illegality should not carry social stigma and a supportive environment is needed for “second chance” entrepreneurs.
At governmental level, the SFA has challenged the State to move on from the approach of backing a handful of winners. This has been effective to date, but a new strategy is needed to bring Irish business to the next level. The role of the State should evolve to focus on creating a world-class business environment that can support new and small businesses on the broadest possible scale.
This requires major investment in transport and broadband infrastructure, a complete redesign of the social welfare system, and innovation in the education system to promote skills such as resilience, critical thinking, risk assessment and collaboration.
These elements all form part of the SFA’s vision for small firms in Ireland. Addressing setup and survival challenges for small business has the potential to create 195,000 jobs by 2021, in addition to the 100,000 that the sector is already expected to create. By boosting productivity, these measures could permanently add 1.5% to GDP at a conservative estimate, or 4.9% if we reach UK levels of productivity.
The SFA believes Ireland could be the best small country in the world in which to do business — we’re not there yet, but with action on the issues facing small businesses, we can get there and reap the benefits for our economy and society.