By Ken Wolff
There are two key aspects to the government’s ‘jobs and growth’ mantra: one that it has been successful in creating 300,000 jobs and that its cut to company tax for small businesses will encourage business expansion (growth) and create more. Both assertions, however, are a bit rubbery to say the least.
For the claim about 300,000 jobs, you have only to look at their ‘glossy brochure’ style budget overview. The graph on page three shows that about 200,000 of those jobs were created in ‘household services’ and about 150,000 in ‘business services’ but there was a loss of jobs in ‘agriculture, construction and mining’ and over 50,000 jobs lost in manufacturing. That loss of manufacturing jobs is for 2015 alone and takes no account of coming losses as Holden, Ford and Toyota close: so there are many more job losses to come.
‘Household services’ comprises the ABS defined industries of:
- accommodation and food; education and training; health care and social assistance; arts and recreation; and ‘other services’
‘Business services’ comprises:
- professional, scientific and technical; financial and insurance; administration and support; rental, hiring and real estate; and information, media and telecommunications.
I have listed those industries because ABS data from November 2015 shows that ‘household services’ includes most of the lower paying jobs. ‘Accommodation and food’ is the lowest paid of all industries at $1072 for average weekly full-time earnings; ‘other services’ is $1164; and although education and training averages $1591, the average weekly earnings across the five ‘household services’ industries is $1332.
‘Business services’ on the other hand includes more higher paying industries and across its five industries averages $1574 for weekly full-time earnings, over $200 more.
Are you getting the picture? — more than half of the jobs growth is occurring in the lower paid areas. And these figures are based on average full-time earnings, whereas these areas also include many part-time employees and casuals earning less. (Overall average weekly full-time earnings at the time was $1561 but average weekly earnings dropped to only only $1146 when part-time and casual workers were included.)
As at February this year household services employed in total 3.95 million people and business services 2.32 million. But employment growth appears to have slowed since August last year. For example, in trend terms, employment in the accommodation and food area fell 0.2% in August, 0.3% in November and another 0.3% in February. Even in areas that are continuing to grow, growth has slowed: health and social assistance grew 1.8% in August, 0.6% in November and only 0.1% in February. Across all five industries in that sector there has been an average downturn of 0.3% in employment between November 2015 and February 2016 (or about 12,000 jobs).
Business services has fared better but there is still evidence of employment growth slowing. Even financial and insurance services which had growth of 3% in August had slowed to 2.3% in February and professional, scientific and technical employment had slowed from 1.1% growth in August to only 0.1% in February.
So where will the jobs come from if employment growth is slowing? Will the government’s small business tax cuts really provide the boost it claims? — the nature of small businesses suggests not.
The ABS defines small businesses as having fewer than 20 employees, while the ATO defines them as having a turnover of less than $2 million. Medium sized businesses have 20 to 199 employees and large businesses, 200 plus.
In a 2012 report, there were 2.05 million small businesses, or 96% of all businesses in Australia: there were 81,000 medium size businesses and about 6,000 large businesses. (I noted that Bill Shorten was referring to small businesses as making up 93% of Australian businesses, which may be an updated figure.) Small businesses accounted for 47% of employment, medium businesses 23% and large businesses 30%. Despite their predominance, small businesses accounted for only 35% of production, medium businesses 22% and large businesses 42%. Although 42% of small businesses were engaged in exporting goods, they contributed only 0.5% of the value of exports.
Sixty-four percent of small businesses (1.31 million) had no employees and another 25% had from 1 to 4 employees, meaning 89% of small businesses employ four people or fewer.
The government may argue that its approach will see some small businesses become medium sized businesses and thus create considerably more employment but that does not fit previous history.
Around 300,000 new small businesses begin operations each year, representing around 15 per cent of the total number of small businesses, while a similar number cease to operate.
… The small businesses most likely to expand are those with between 1 and 4 employees, while few businesses without employees evolve to take on employees. These rates of expansion and contraction appear reasonably stable over time, with similar rates in 2007/08 and 2010/11 despite different economic conditions. [emphasis added]
So two-thirds of small businesses are unlikely to add jobs to the employment equation.
Small businesses do not fare as well as larger businesses. Surveys by groups like the ACCI and the banks regularly show that when business conditions are poor, they are worse for small business; and when business confidence is low, it is lower for small business. The report suggests that staffing of small businesses had fallen in the period leading up to 2012, although medium and large businesses had either increased or maintained staffing levels (but have fallen since). So the evidence is that small businesses are more susceptible to economic winds.
The major source of funding for small businesses is personal savings: personal credit cards are also used in about 20% of cases. One problem is that small businesses face about a 1.5% premium on bank business loans compared to bigger businesses because of higher ‘risk’ — they are seen by the banks as having more volatile revenue streams. That leads to small business owners using personal credit products rather than business products.
The RBA also reported that:
The strong links between small businesses and households also accords with the finding that while small businesses tend to have less debt than large businesses, households that own small businesses tend to have higher debt than other households …
So small business debt appears as personal debt, not company debt. A tax cut does not change that.
Small businesses are also meant to be encouraged by Turnbull’s innovation policy but:
In a random sample, funding by business angels and venture capital firms is close to non-existent. This is quite different from the picture of “typical” start-ups from the business press or business school textbooks. The similarity in the patterns for nascent and young firms also suggests that there is usually no radical change in the funding pattern from inception through early life. [emphasis added].
Finally, surprise, surprise — a bit like negative gearing being highest in Turnbull’s electorate — in NSW the two electorates (outside the City of Sydney) with the highest number of small businesses are North Sydney and Wentworth. Little wonder Turnbull is offering a tax cut to small business. Perhaps it is mostly about his own re-election rather than the re-election of the LNP government! Or, at the least, he is allowing his thinking on these issues to be overly influenced by the circumstances in his own electorate.
What do you think?
Is small business really the saviour for ‘jobs and growth’ that the government thinks it is?
Will a tax cut for small business encourage expansion or will such businesses use it to pay down their ‘personal’ debt?
This article was originally published on The Political Sword
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