Speech to the Federation of Small Business Conference

Speech by Dr. Vincent Cable MP, Liberal Democrat Shadow Chancellor of the Exchequer delivered to Federation of Small Business Conference on Fri 19th Mar 2004

Can I thank you for your invitation. The Lib Dems have maintained good relations with the FSB via Brian Cotter, our small business spokesman, and I have always found Stephen Alambritis and his colleagues a source of good advice and effective lobbying on behalf of your members.

I can't claim to have run a small business. I came to parliament out of a very big business, though if Shell continues to make mistakes and disappoint its shareholders it will soon return to being a very small business. My main direct contact with the FSB is through one of its members in Twickenham who happens to be my dance teacher, since when I am not politicising I am working on my slow foxtrot.

We have just had Gordon Brown's budget. I try to be fair minded and give credit where it is due rather then make negative party points. The economy is in reasonably good shape, unemployment is healthily low; and government debt is under control. But Gordon Brown's overriding weakness is an irresistible urge to meddle and fiddle, to generate complexity out of simplicity (not that the tax system was ever that system for business). He has been likened to Claudio Ranieri, the manager of Chelsea, the Tinkerman.

One of Tinkerman's favourite wheezes was the zero rate on incorporated business on which he has now doe a U-turn (though in attempting to hide this u-turn he has now made the tax system even more complex in this area.) He has managed to annoy three groups of business people: those who went to the trouble and expense of incorporating and now face the loss of this tax concession, (the government's tax on distributed dividends will claw back £450 million) those long standing genuinely incorporated, businesses who never sought to take advantage of a tax break but now face paying 19% on their dividends, and finally those who remain unincorporated and still face less advantageous treatment. There is no economic, moral or any reason for treating incorporated businesses quite differently from unincorporated businesses.

What I hear from many small businesses is the cost of the shear complexity of the system. One of the proudest boasts of my constituency is Hampton Court Maze but getting to the centre of the maze is a positive doddle compared to getting one's head around Tolley, the tax guide.

The problem, as you know, has been compounded by the cynical practice of getting businesses PAYE to act as an unpaid tax collector and benefits agency from the government; student loans, child support agency deductions working family tax credits and much else. What I and my Liberal Democrat colleagues are doing at present is reviewing business taxation with a few to striping out the complexities of the tax system and removing numerous complicated little tax breaks and gimmicks, and using the revenue to provide a straight forward tax cut for business. I am looking to the FSB to advise me which is the best way to make the cut.

This merges into a wider problem of regulation and the burden thereof, especially for small companies. Successive governments have piled on more and gold plated European regulation, so there is nothing unique about this government, but some of its regulatory activities- the Data Protection Act, criminal records checks, the rules around the working time directive, money laundering rules have been dreamt up by Home Office, Treasury and DTI officials who seem to have nothing better to do than fill forms in all day.

The governments attempts at deregulation have be utterly pitiful with only 14 rules scrapped since the Regulatory Reform Act came into force 2 years ago.

The Better Regulation Task Force has listed at least 108 separate 'watchdogs'; Sir Peter Gershon has estimated that the cost of regulators to the tax payer (let alone businesses) has risen to £15 billion a year and the cost of the 11 largest regulators has risen by 50% since 1997. Evidence is mounting of what is called 'regulatory creep'

What is the answer? I don't think there is a simple solution. As a politician and legislator I know hoe difficult it is to say 'no' to people who- often for very good reasons- believe there has to be tighter protection of consumers, workers or the environment. One of the main reasons for the Equitable Life disaster was that there was a "bonfire of controls" in prudential regulation in the early 1990's. The paper work was no longer done by the regulators to check the accuracy of the actuarial reports. Hundreds of thousands have lost a lot of money as a result of the regulatory failure.

Indeed, within my period in parliament there has been a big expansion of regulation in areas like the protection of consumers of financial services and to provide for more family friendly working practices which -very frankly- no politician of any parity is going to vote against whatever they may say in order to curry a favour with small businesses. Before that, Mrs Thatcher spurred a whole new generation of regulators to oversee privatized industries.

So the issue is how to reconcile politicians and the public's appetite for more regulation. With your legitimate concern to be prevented from getting on with your legitimate business activities and the wealth creation without which there wouldn't be anything left to regulate.

One step I believe is to have a system where any new legislated regulation has to satisfy a proper cost benefit test: a regulatory impact assessment which a Minister has to sign off on personally. These assessments are carried out but unevenly or inconsistently and some off the least business friendly departments like the Home office ignore them and the European Commission is even worse. These tests should be obligatory and vetted independently as in Holland.

If Civil servants and ministers were forced to jump through the hoops, they would be forced to examine more carefully the costs and benefits of regulation and some of the ridiculous 'gold plating' would be avoided.

For the same reason I support 'sunset clauses' not just for now but for existing legislation, to force to those in Parliament and administration to justify why such measures are necessary. I also like the idea of a single inspectorate for regulation to prevent duplication and overlap between different inspectors in field such as HSE.

There is also a deeper cultural problem: the idea that Whitehall knows best. In fact, Whitehall is often profoundly stupid. The story is told by defence contractor of the regulations governing…

One of the reasons I have advocated the Treasury -and with it the Inland Revenue and Customs and Excise- should be relocated to a provincial city like Liverpool is that it not only merely saves a great deal of money (£500 million for the Treasury alone) but breaks the Mandarin myth that all the brains of Britain are contained in the wisdom of Whitehall.

One of the main messages coming out of the budget is that we have reached the limit of sensible increases in public spending. There is no more appetite for a rapid growth of tax financed public spending without clear evidence that the money is being used well. I have argued that government spending should in future rise no faster than the economy as a whole, while recognising that there are some areas, like care for the growing number of frail and elderly which are bound to grow rapidly.

There have to be tough choices. It is the easiest thing that world for politicians in opposition to talk hopefully about cutting waste; every election manifesto I can remember contains this triumph of hope over experience. We have instead tried to identify precisely what the government should do less of.

One area I have identified is trade and industry. I would scrap the DTI and many of its activities (and DEFRA too for that matter). You might say, "What about all those schemes helping out small businesses." Well, much of the feedback I get in that DTI schemes are often--like business links--pretty hopeless, with big administrative overheads and relying on advisors who have failed in business themselves or never tried it. Well intended projects like the Regional Venture Capital Funds are not reaching the companies who need them.

One of Britain's entrepreneurial success stories, Ghulam Noon, recently pleaded with this Mrs Hewitt at a business conference: 'Will the government please stop trying to help us? Just get off our backs.' I agree with that approach and I hope you do. I didn't believe that the £3.4bn slush fund the government has legislation for to provide unspecified industrial assistance could not be better used, for example, ensuring that that there are enough matters and service teachers in schools to stop the downward spiral of the declining standards in there key disciplines which are the basis of our knowledge economy. I have lost count of the number of business who have told me of their frustration at training school leavers who do not understand percentages. Nor do I believe the tax payer should make lavish payments to its Duke of Devonshire and his ilk through DEFRA's mad cap farms subsidy schemes or allow DEPRA to retain 13000 plus civil servants. These are the kinds of cuts in spending needed to keep taxes down. What Brown announced on Wednesday was only a start and relied to heavily on vague promises to cut waste.

I do however believe the government has as important role. Its job is to make sure that the infrastructure counts, including education. It also has to ensure that market economy function through effective competition and control over cartels. For example we need a more active Office of Fair Trading and stop excessive charging by banks. Three years after the Cruickshank report established the existence of profiting at the expense of small business little has been done by Gordon Brown to give teeth to its competition policy.

The government also has a duty to ease the difficulties, which it part created for itself of massive increases in public and employee liability insurance. The introduction of 'no win no fee' litigation was seen by the government as smart way to cut legal aid bills; but it has backfired in the form of massive increases in insurance bills. The feeble report of the DWP doesn't ever begin to address the underlying problem.

So, let me conclude. I never run or started a small business (though unlike most MP's I do have previous private sector experience). I do therefore come in the spirit of humility to listen and learn to your ideas.