FSB Policy Report | FSB Scotland Budget Priorities

FSB SCOTLAND BUDGET PRIORITIES

FIVE BUDGET PRIORITIES

FSB Scotland has identified five budget priorities which can mitigate the cost of doing business crisis:

UNSPENT FUNDING

1 2

Collate and repurpose any unspent Covid-19 support funding to mitigate energy bills and other rising overheads for those businesses most in need of support. This year’s budget must sufficiently direct resources towards economic recovery.

BUSINESS RATES RELIEF

Continue the Small Business Bonus Scheme and deliver targeted support for smaller firms in sectors hit hardest by the ending of the temporary Covid-19 rates relief schemes.

RELIEVE REGULATORY PRESSURES

3

Fully assess the potential business impacts of any forthcoming regulations and postpone any non-essential regulatory changes that would place additional strain on businesses.

CAPITALISE SNIB FOR SMES

4

5

As access to finance for SMEs becomes more difficult, at least 20% of the Scottish National Investment Bank’s annual investment budget should be directed to small and micro businesses.

GET MAXIMUM VALUE FROM PUBLIC SPENDING

Realise the full potential of Community Wealth Building by introducing binding targets for increased government, and other anchor institutions’, spend with micro businesses.

BACKGROUND

The Federation of Small Businesses (FSB) is Scotland’s leading business organisation and aims to help smaller businesses achieve their ambitions. These micro and small businesses comprise almost all enterprises in Scotland (98%), employ around one million people and contribute £68 billion to the economy.  However, as public sector Covid-19 support has been wound down, there is a risk that more businesses will be lost to the economy. Indeed, findings from FSB’s Business Confidence Index for Q2 20221 showed that around 1 in 6 Scottish small businesses expect to shut, sell or shrink in the next year.

The stability for which the business community had hoped for has not yet returned and business confidence remains depressed. FSB’s Confidence Index for Scotland fell to -31.8 points for the second quarter of 2022, the lowest level seen since the end of 2020.

Nine in ten Scottish firms (91%) reported an increase in costs in the second quarter of 2022. When asked to identify the source of increasing costs, 73% of Scottish businesses pointed to fuel while 67% cited utilities.

Household spending accounts for almost two thirds of Scotland’s GDP, but many people have seen their costs rise faster than their income. Since the beginning of the year, households have been increasingly uneasy about spending money as inflationary and cost of living pressures have increased, with the consumer sentiment indicator falling to -30.4 in June; its lowest level since December 2020. 2 This has a knock-on impact on the small businesses for whom these households are customers.

1 in 6

Scottish small businesses expect to shut, sell or shrink in the next year.

1 https://www.fsb.org.uk/resources-page/fsb-scotland-small-business-index-q2-2022.html

2 https://www.gov.scot/publications/monthly-economic-brief-july-2022/documents/

The Scottish Budget 2023-24 will clearly be set against the backdrop of an economically challenging time for both businesses and households. Scotland’s small business community has suffered significant setbacks throughout the course of the last two years and, despite the best efforts of government to mitigate the damage done by the pandemic, they are facing rising inflation, increasing energy prices, supply chain disruption and staff shortages.

Many small businesses are facing these challenges with severely depleted cash reserves and/or emergency Covid-19 loans to repay. As of July 2021, businesses in Scotland had taken on at least £4.1 billion of loans through the Coronavirus Business Interruption Loan Scheme (CBILS) and the Bounce Back Loan Scheme (BBLS).3 Therefore, there is not an abundance of breathing space for many firms and the position is exacerbated by the fact that, in many key markets such as energy, they have a bargaining position more akin to that of a domestic consumer but enjoy none of the protections afforded to households.

£4.1 billion

CBILS

BBLS

As of July 2021, businesses in Scotland had taken on at least £4.1 billion of loans through the Coronavirus Business Interruption Loan Scheme (CBILS) and the Bounce Back Loan Scheme (BBLS)

FSB Scotland welcomes the recent measures introduced by the UK Treasury to deliver an Energy Bills Relief Scheme4, however it is important to recognise that operational costs are still considerably higher than at the beginning of the year. It is also worth noting that the relief scheme has an initial six-month shelf life, creating the prospect of a cliff edge in April 2023 for most beneficiaries.

3 https://www.british-business-bank.co.uk/press-release/analysis-of-final-coronavirus-loanscheme-data-shows-79-3bn-of-loans-to-1-67m-businesses-evenly-distributed-across-whole-ofthe-uk/

4 https://www.gov.uk/guidance/energy-bill-relief-scheme-help-for-businesses-and-other-nondomestic-customers

1. REPURPOSE UNDERSPENT COVID GRANTS

While FSB Scotland appreciates the financial constraints within which the Scottish Government is operating, it is important that the budget sufficiently directs resources into Scotland’s economic recovery.

For example, as has been widely reported, the recent report by Audit Scotland5 suggested some clarity is required over how Covid-19 funding was spent. It notes that at the end of 2020/21 over £2 billion went to reserves held by the Scottish Government, councils, and integration authorities, but found it was not possible to say how much of that was from Covid-19 funding. At the same time, we understand the Scottish Government has stated this does not reflect the entirety of spending for 21/22, and that there are no unspent Covid-19 funds at present.  It has therefore been difficult for us to ascertain the true picture and, as such, we feel the situation would benefit from greater clarity and transparency.

Whatever the exact financial position, the forthcoming Scottish Budget would be an ideal opportunity to repurpose any unspent funds identified to mitigate energy bills and other rising overheads for those small businesses in most need of support.

On a related point, FSB would also welcome increased government efforts to produce comparable budget numbers for previous years, listed under consistent budget headings. Their absence inhibits scrutiny of spending changes and does not help improve overall transparency.

Whatever the exact financial position, the forthcoming Scottish Budget would be an ideal opportunity to repurpose any unspent funds identified to mitigate energy bills and other rising overheads for those small businesses in most need of support.

2. BUSINESS RATES RELIEF

Over three quarters of single-property premises-based Scottish small businesses qualify for a full or partial rates discount through the Scottish Government’s flagship Small Business Bonus Scheme (SBBS). 6 The latest round of statistics showed that 111,180 (93%) of the 119,490 properties receiving SBBS relief received 100% SBBS relief, and a further 3,150 properties combined SBBS relief with another relief to add up to 100%.7 This scheme has been a lifeline for many firms since its inception and it has never been more valuable than it is now. We therefore welcome the Scottish Government’s commitment to continue the SBBS for the life of this parliament.

FSB Scotland also welcomed the extension of the Covid-19 rates relief for businesses in particularly hard-hit sectors through the first three months of the 2022-23 financial year. However, time has now passed, and further crises have emerged, and these businesses are without a safety net of support.

Given the spiralling cost of doing business crisis and other cost pressures outlined above, FSB Scotland is also asking the Scottish Government not to raise the poundage rate and take into consideration the pressures facing businesses when setting the rate following revaluation.

The business rates system also offers opportunities for small business support and to incentivise installation of renewable energy systems, contributing to government goals around Net Zero. For example, we are supportive of asks to exempt rooftop commercial solar from non-domestic rates for the first twelve years, on a rolling basis, as is currently the case in England. We welcome the Chief Planner’s recent commitment to bring forward consideration of Permitted Development Rights (PDR) for such development.

three quarters Over

SBBS

of single-property premises-based Scottish small businesses qualify for a full or partial rates discount through the Scottish Government’s flagship Small Business Bonus Scheme (SBBS)

6 https://www.gov.scot/binaries/content/documents/govscot/publications/research-andanalysis/2022/03/evaluation-small-business-bonus-scheme2/documents/evaluation-smallbusiness-bonus-scheme/evaluation-small-business-bonus-scheme/govscot%3Adocument/ evaluation-small-business-bonus-scheme.pdf

7 https://www.gov.scot/publications/non-domestic-rates-relief-statistics-2021/pages/2/

3. RELIEVE REGULATORY PRESSURES

Small businesses are currently navigating the most difficult trading environment in decades. Few have the time, expertise or, crucially, the resources, to make their operations more sustainable without external advice and funding support. Despite these constraints, small businesses are doing their best to deliver more sustainable practices on the journey to Net Zero. Research by FSB at the end of 2021 found that 74% of small businesses in Scotland have already taken steps towards reducing their emissions8.

Accordingly, as government begins to develop a range of initiatives to help businesses meet environmental and health outcomes, it is worth bearing the current landscape in mind. Any regulatory changes should not create any additional strain for businesses at this time.

FSB Scotland is therefore asking the Scottish Government to fully assess the potential business impacts of any forthcoming regulations and postpone any non-essential regulatory changes that would place additional strain on businesses – at least until business conditions ease.

74%

of small businesses in Scotland have already taken steps towards reducing their emissions

8 https://www.fsb.org.uk/static/ffed4d13-7db0-4ea2-b95f1d8941a69481/ACCELERATINGPROGRESS-Empowering-small-businesses-on-the-journey-to-net-zero.pdf

4. CAPITALISE SNIB FOR SMES

The Covid-19 pandemic, coupled with ongoing economic uncertainty, has adversely impacted Scotland’s small business community, creating financial instability and heightened liquidity problems.

Small businesses disproportionately rely on external finance for their business operations, cashflow and investment opportunities. Forthcoming FSB research shows that our members often do not have excess capital available to expand and invest without outside funding. Small businesses frequently struggle to acquire adequate finance and are generally considered riskier to lend to. Given the recent economic turmoil of the pandemic, the economic slowdown and inflationary pressures, the fear is that UK financial market may begin squeezing lending to small businesses.

As mentioned above, small businesses are also saddled with emergency debt acquired over the past two years that will take a significant period to repay. This is not evenly distributed, with those small businesses in sectors more adversely affected by the lockdown measures having accrued greater proportions of relative debt.

The concern, as public sector support is dialled back and access to finance is tightened, is that we will see more businesses falling into liquidation, adversely impacting Scotland’s efforts in its wider economic recovery. FSB believes there is an opportunity to capitalise on the Scottish National Investment Bank’s lending capabilities to increase SMEs’ access to finance. By targeting at least 20% of SNIB’s annual investment budget to small and micro businesses we can ensure that the bank is investing in Scottish businesses, projects, and communities to deliver environmental, social, and financial returns for the people of Scotland, as is its stated ambition.

By targeting at least 20% of SNIB’s annual investment budget to small and micro businesses we can ensure that the bank is investing in Scottish businesses, projects, and communities to deliver environmental, social, and financial returns for the people of Scotland.

5. GET MAXIMUM VALUE FROM PUBLIC SPENDING

Total Scottish public sector procurement spend in 2019-20 was £15 billion. However, less than £550 million was won by micro businesses9, despite them accounting for 93% of the Scottish business population.

For ambitious projects such as Community Wealth Building (CWB) to realise their full economic potential, it is important that maximum value is extracted from Scottish public sector spending. It is important that the share of public spend secured by small and micro businesses increases. Thus, as part of the forthcoming CWB legislation, statutory targets should be put in place to increase public sector bodies’ – and other publicly funded anchor institutions’ – spend with smaller local firms.

Alongside other measures put forth in the Community Wealth Building Bill, it is also important that the Budget does not restrict public purchasers to such an extent that they are unable to realise the Bill’s aims in the years ahead.  9 https://www.publiccontractsscotland.gov.uk/helpandresources/download/259fa412-4198-4b5fa710-0deb3dd3d273

Total Scottish public sector procurement spend in 2019-20 was £15 billion

However, less than £550 million went to micro businesses

despite them accounting for 93% of the Scottish business population

CONCLUSION

Scotland’s small business community has suffered significant setbacks throughout the course of the last two years and is now dealing with the added threat of rising inflation, increasing energy prices, supply chain disruption, poorer payment practices and staff shortages.

There is a risk that more businesses will be lost from the economy if the status quo remains. To help micro and small businesses, which support over a million jobs and contribute £68 billion to the Scottish economy, the next budget must make sure the operating environment is as conducive to survival and growth as possible.

FSB believes the priorities and policies set out above would enable the Scottish Government to relieve some of the pressures facing small businesses and the wider Scottish economy.

For more information, please contact scotland.policy@fsb.org.uk

© Federation of Small Businesses

FSB Scotland

58 Waterloo Street, Glasgow G2 7DA

Tel: 0141 221 0775

scotland.policy@fsb.org.uk

fsb.org.uk/scotland

federationofsmallbusinesses @fsb_scotland @fsb_uk

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