Advertisement

Our markets subsidise the debts of big business while starving small companies of capital

The Prime Minister has rightly talked a lot about the need for “responsible capitalism” since taking office. The Government has outlined measures for consultation around, for example, corporate governance and executive pay. This is welcome and the measures worth exploring. But she has also been consistently clear that the democratic vote for Brexit in June was about more than just a decision to leave the EU – in her words it was also a vote “to change the way the country works and the people for whom it works”.

When the British people voted in the referendum last June, they did not simply vote to withdraw from the European Union; they voted to change the way our country works

Theresa May

This is a fundamental point, because while it is one thing to shine a light on capitalism as it is, to make it more transparent, it is quite another to change the way it works – and who it works for. Capitalism is meant to help, not hinder the economy, by providing capital for companies to innovate, grow and create jobs. The reason it has become so unpopular is because during the financial crisis it did the opposite. It starved the economy of finance and the reason was the same as it has been at every financial crisis – over-leverage in the banking system, otherwise known as debt.

This is illustrative of who capitalism currently works for and who it doesn’t. Debt may be a suitable (and tax deductible) form of corporate finance for established blue chips who, in the last decade, have been low growth and created few net new jobs. It allows them to manage and refinance their obligations. But it is fundamentally ill-suited to helping the companies best positioned to drive economic growth and create new jobs: start-ups and Small and Medium Enterprises (SMEs).

Small companies in receipt of a bank loan (if they can get one) must prioritise managing that debt or risk default. What they need is patient equity capital, where people seek investment to grow their business whether through individual investors, on capital markets, or crowdfunding and peer-to-peer platforms. This allows them to invest all their capital in innovating and growing.

But while €570 billion of UK and European taxpayers’ money was spent subsidising corporate debt last year, every pound of UK equity was taxed four times – through corporate income tax, capital gains tax, stamp duty and a financial transaction tax, known as stamp duty. It is clear who capitalism currently works for.

For an economy to work for everyone, capital must surely flow from investors to innovators and small business owners up and down the country, instead of being concentrated through a few big banks to established firms. As we build a new post-EU economic model there is no excuse not to put backing these entrepreneurs at the heart of our strategy.

First, the economic potential of equity finance is clear: when the Government made shares on AIM (the UK’s uniquely successful capital market designed specifically for SMEs) eligible for Isa inclusion, £4 billion flowed into them practically overnight, helping them to grow and invest.

Second, the economic potential of our SMEs is phenomenal: the UK created over 650,000 new start-ups last year (a record) and has twice as many SMEs as our European competitors on average at 5.4 million. A 1 per cent increase in the number of “high growth potential” businesses in the UK would create 230,000 new jobs and add £38 billion to UK GDP.

Third, because these companies are highly innovative – our analysis shows the 1,000 most dynamic companies in Europe have over 4,000 patents and trademarks between them – the jobs they create tend to be high quality and well paid, helping address Britain’s productivity problem.

Fourth, innovative equity-funded firms can demonstrably help us achieve the Government’s stated aim of achieving Brexit success through exports. Companies listed on AIM are five times more likely to export than the national average.

And don’t forget President Trump. The headlines may have been dominated by walls, travel bans and airports, but he is also quietly preparing policy around “Capital Formation” – making it easier for US SMEs to raise capital. With too little global capital flowing into UK companies as it is (the percentage of UK pension funds invested in UK equities has more than halved in 10 years) we cannot afford to become less globally competitive in this area.

This is why I welcome the Government’s review into patient equity capital and eagerly await the outcome of its industrial strategy consultation. This newspaper is also correct that an industrial strategy should not be about “picking winners”. I believe it should be about giving everyone a level playing field instead.

So the Government should continue to address these issues by recalibrating our tax system to give alternatives to debt finance a chance and truly put access to finance for SMEs at the heart of its industrial strategy. Equity funding is the way to make capitalism work for the many, not the few, and to help those UK companies best positioned to drive economic growth and job-creation post-Brexit. It was, after all, invented here in the UK.

Xavier Rolet is CEO of London Stock Exchange Group