Chancellor Philip Hammond’s third Budget won’t live long in the memory. With the Government in the midst of the final stages of the Brexit negotiations, the Budget was always expected to be a low-key affair, and he managed to live up (or down) to expectations. The Chancellor announced a number of measures aimed at boosting public services spending, raising income tax thresholds and the beginning of the end of austerity.
Few rabbits in the hat
But the absence of any major or unexpected policy announcements presented the opportunity to take a closer examination of the growth forecasts published by the independent Office for Budget Responsibility (OBR). The OBR took away some of the gloss from Philip Hammond’s despatch box performance by offering a sombre set of statistics. It revised its forecast growth for full-year 2018 down from 1.5% to 1.3%, and labelled it a “relatively stable, but unspectacular trajectory for economic growth”.
With the UK’s annual growth some way behind the average for G7 countries, and with heightened concerns over the likelihood of post-Brexit trade agreements, the OBR’s assessment paints a somewhat circumspect picture.
But there are still strong grounds for optimism. The UK continues to be a really vibrant place to set up a company. We are known across the world for innovation and business know-how. That is something to be proud of. But if we want to build highly successful companies capable of thriving on the global stage, we need to do two things. We need to get the hopper of early-stage companies as big as possible. And then those businesses need to get the help they need to scale.
Championing British success
At Octopus we understand the importance of fostering growth. We have always championed the UK’s small but incredibly potent High Growth Small Businesses (HGSBs). These are a tiny subset of the UK economy, and they are defined as fast-growing companies with annual turnover of between £1 million and £20 million, and which have recorded an annual growth rate of 20% or more for at least three years.
There are around 20,000 HGSBs all around the UK, and their continued success is integral to the future prosperity of the UK. Despite representing just 1% of all UK companies, they are responsible for around 20% of all new job creation. These businesses create three times as many jobs as the companies listed on the FTSE100 do. In an era of sluggish growth, it’s vitally important that the Government recognises the contribution of these businesses and continues to do whatever it can to nurture them.
The role of patient capital
Five years ago, the Treasury allowed ISAs to start investing in businesses listed on the Alternative Investment Market. This has also been powerful in creating ‘patient capital’ for growing businesses. (Patient capital is the name given to debt or equity investment into early-stage businesses, where the investment is expected to remain in place for the medium to long-term, helping the business to grow.)
Therefore, it was encouraging to see that a follow-up to last year’s “Financing Growth in Innovative Firms” consultation (sometimes referred to as the Patient Capital Review) was published alongside the Budget. This year’s document gave a clear affirmation of the Government’s support for British venture capital. It aims to further strengthen the UK’s position as a global centre for high-growth companies and investors and to support the wider UK venture ecosystem in three ways:
- By exploring ways to overcome barriers to female entrepreneurship
- By expanding the pipeline of talent in UK venture capital
- By creating an environment in which businesses can leverage their innovation to access the finance they need
The Government is also considering ways to enable investors to direct some of their Defined Contribution pensions into patient capital. This could be a valuable source of financing for smaller companies, alongside existing mechanisms such as the Enterprise Investment Scheme, Venture Capital Trusts and Business Property Relief. A feasibility study is being run by the British Business Bank and a number of the largest pension providers to look at this opportunity, and the Financial Conduct Authority is expected to soon publish a paper exploring possibilities in this space.
We’re very keen to support all of these aims, and we will be talking to Government to see how we can get involved.
It’s been a year of uncertainties, and 2019 is likely to be even more unpredictable. But I can say that now more than ever, we need to get better at talking positively about business, and wealth creation, and about the value of entrepreneurialism and what it can achieve. If the UK is to deliver on its long-term growth ambitions, we can’t afford not to.