Growth – this is the by-word for the new UK Government, which has pledged to put sustainable and inclusive economic growth at the heart of their plans for government.
But what does this mean for the Welsh economy and for small businesses and the self-employed in Wales?
Generally, a growing economy comes with improving economic conditions including faster wage growth, increasing employment and stronger public finances. A commitment to growth is therefore welcomed, as is the focus set by Wales’ new First Minister Eluned Morgan on prioritising the Welsh economy to spread prosperity.
Growth is measured in the UK using Gross Domestic Product (GDP), which the Institute for Fiscal Studies describes as “the flow of income generated in a country in a given year”. Whilst there are questions about whether GDP is the most useful metric for measuring the standard of living, it is key to understanding the UK Government’s approach to the public finances as they have set themselves a target of getting debt falling as a percentage of GDP.
This means that lower GDP leads to less money for the Chancellor.
All eyes are therefore on the Autumn Budget where the Chancellor Rachel Reeves will set out departmental budgets for this financial year and the next, and to the Spending Review in Spring 2025 which will set the budgets for the following three years.
Where the Chancellor decides to allocate money and how she decides to raise money will have significant implications both for the financial environment in which small businesses operate and for the Welsh Government’s budget, with the latter being decided by the level of spending in Westminster.
Both governments have been quick to set the narrative that they are operating with limited resources. The Chancellor has laid the groundwork for a difficult budget in the Autumn, warning of a £22 billion hole in the public finances. Wales’ First Minister has warned that the public finances are in a dire state, requiring tough decisions.
There are huge pressures on public finances but to become a high-growth, productive economy, the UK needs successful businesses and new, innovative companies. That means that to achieve the target of a sustained improvement in growth, businesses must be given the right conditions to flourish. This includes boosting exports, improving connectivity and investing in skills.
The Federation of Small Businesses’ manifesto for the General Election set out a blueprint for how the UK Government could support SMEs’ capacity and capabilities for sustainable growth, starting with creating the right tax environment. Increasing the VAT threshold to £100,000, uprating it in line with inflation and introducing a smoothing mechanism for businesses as they grow above this threshold would remove a major barrier for growth for small businesses and recent start-ups.
There are also legislative measures the UK Government could take to help small firms. They could clamp down on big businesses with poor payment practices towards their smaller suppliers and improve small businesses’ ability to access finance by addressing regulatory gaps on personal guarantees.
Rebuilding the Welsh economy will require the UK and Welsh Governments to nurture a strong partnership. Too often, political differences between the parties in government have got in the way of a clear, united mission on growing our economy and supporting businesses. With the same party now forming both governments, businesses will not excuse a failure to show common purpose in supporting their ambition. An important starting point will be clarity on how the Shared Prosperity Fund and regional investment agenda will evolve and what role the Welsh Government will play in this.
There are huge opportunities in Wales such as the development of floating offshore wind, the growth of the compound semiconductor cluster and boosting creative industries. Ensuring Welsh-based and Welsh-grown businesses are at the heart of those opportunities will require the energy, resources and talent of UK, Welsh and local governments working in unison with business and other sectors and aligning all levers to catalyse economic success.
To deliver on the UK Government’s growth mission and the Welsh Government’s commitment to boosting economic prosperity, strengthening Welsh SMEs’ capacity and capabilities for sustainable growth will be key because when small businesses succeed, it is good for jobs, good for communities and good for the whole economy.
