Decisions Facing Rachel Reeves on 8/5/15 (No 10: Reasoned Approach to Promoting Self Employment) #GE2015

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Number 10: Time to Take a Reasoned Approach to Promoting Self Employment

Self-employment is not all it is cracked up to be, particularly if you write to the Prime Minister saying that you are aiming to be the next Richard Branson. And believe me, they did and said they signed up fully to the enterprise culture too. They usually ended their letters by asking Mrs Thatcher for a grant to help set up their business. I blame our schools for not explaining enough about the meaning of irony!

About ten years or so ago, Birmingham City Council hired a firm of reputable consultants (yes, they do exist) to review its spend on enterprise support. The consultants’ report came to a very definite conclusion that the City got a bigger return from every pound spent on support to existing businesses, mainly SMEs than it got from encouraging new business start-ups. Logically, the City should switch the bulk of its resources to the former. I have no idea what happened to the report.

The survival rate, Esther McVey, for new businesses is very low and, I suspect the attrition rate is highest amongst those started by young people. Sir John Harvey Jones (the one and only Troubleshooter, Sir Digby Jones) said, in my hearing, that young people were, in his experience, least likely to do well in making a new business a success. He counselled against anybody doing it until they had put their children through university and paid off their mortgage. The chap had an awful taste in ties, but he was full of empathy for those trying to make a go of being in business.

Esther McVey has been cock a hoop about the start up rates for DWP’s New Enterprise Allowance. Well, I have an inconvenient truth for her, you do not measure the success or otherwise of a new business start up until the end of its third year of existence. It goes like this, you expect to make a loss in the first year, you hope to break even in the second and you need to make a profit in the third. If you have not made a profit at the end of year three then that is the point where many decide to go out of business. I imagine that Ms McVey hopes to be elsewhere when the bulk of the businesses set up under NEA reach their third anniversary.

There is nothing new about this insight, though. When I started working for DWP’s predecessor back in 1986, the Division in which I worked was undertaking a review of what was then called the Enterprise Allowance Scheme. The review concluded that whilst the overall number of businesses in the economy may have increased so had the turnover. A particular example being the life cycle of window cleaners in East London, courtesy of EAS. You set up your round with your subsidy of £40 (at 1986 values) per week; you kept your prices low and put some of the established business out of work. Then your 52 weeks of £40 per week ended and a new window cleaning business started up in your patch with the help of EAS.

Scroll forward to 1998 and the launch of New Deal for Young People. There was no fifth option within NDYP. There was no self-employment option, either, until the Prince’s Trust and others got to work. NDYP assumed that those wanting to go self-employed would do so without encouragement, using existing provision and support. There was a view, akin to Sir John’s, that encouraging young people to take on debt etc had no place within New Deal. However, the Trust, as it often does, got its way, but not completely. Labour designed the Self-Employment Routeway so that it was very hard for most would be entrepreneurs to access its support. Arguably, those who went through the Routeway would probably have gone into business without its help.

A throwing ordure against the wall, in the hope some sticks, policy of encouraging self-employment has no place in any sane approach to helping people off social security. Any new approach needs to adhere to the principle behind that adopted in 1998. Fewer business start-ups, ones that are more likely to succeed than not will be good for the economy, the (mental health of the) would be entrepreneurs and the taxpayer.

As an aside, unfortunately, a number of funding regimes I have worked with have given more brownie points to business start-ups than business assists, despite the evidence I have cited above.

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