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Governments warned not to unwind SME support too rapidly

Author: ICAEW Insights

Published: 05 Jul 2021

The COVID-19 pandemic has taken its toll on SMEs and entrepreneurs around the world, but even though they are weathering the storm thanks to strong government support packages, big challenges remain, according to a new OECD report.

SMEs and entrepreneurs are fundamental to driving the economic recovery, the OECD SME and Entrepreneurship Outlook 2021 says, and government rescue packages are playing a crucial role in not only helping them to survive but in many cases thrive during the pandemic. 

According to OECD analysis, 55% of SMEs in the UK have been able to access and combine government support, compared to 33.6% in the OECD, with non-repayable forms of support the most popular. However, the report warns that many support mechanisms for SMEs and entrepreneurs have come in the form of debt which, if unwound too rapidly, could precipitate a wave of bankruptcies that jeopardises the recovery. 

Government support has also been less effective at reaching smaller and younger firms, the self-employed, as well as women and minority entrepreneurs, thereby widening pre-existing inequalities, the OECD report warns.

Meanwhile, the UK was more exposed to business disruptions during the pandemic compared to the OECD average, with the most affected sectors accounting for 44.8% of total employment compared to an OECD average of 39.7%. The East of England was the most exposed region, with around 30% of jobs at risk due to the regional concentration of wholesale and retail trade services. 

From a positive perspective, the report says that the crisis has strengthened SME resilience; more than half of SMEs in OECD countries have increased their use of digital tools, which has helped to narrow digital divides with their larger counterparts. The pandemic has also created new opportunities for SMEs and entrepreneurs, through shifting global value chains, stronger local business ecosystems and the green transition, it says.

In the UK, key measures to support SME and entrepreneurs' liquidity include the Bounce Back Loan Scheme with a fast-track finance scheme for small businesses, and the Coronavirus Business Interruption Loan Scheme, providing SMEs with access to loans, overdrafts, invoice finance and asset finance of up to £5m and for up to six years. 

Meanwhile structural measures include a £1.25bn Start-ups Support Plan including the Future Fund for high-growth companies affected by the crisis, £750m Support for SMEs focused on research and development and a Sustainable Innovation Fund accessible to businesses and start-ups who wish to develop smart, sustainability-focused projects.

The report also highlights how recovery packages have placed a high priority on digitalising, reskilling and greening SMEs to build back better. It says governments’ ability to capitalise on the momentum in SME innovation and entrepreneurship will be key to converting them into a broader engine for the recovery. Although UK small firms are ahead of their OECD peers in different aspects of digitalisation, low access to high-speed broadband could hamper future recovery, the report warns. 

“Micro, small and medium-sized enterprises are important engines of growth, accounting for 99% of businesses in OECD countries and driving the creation and diffusion of innovations that boost productivity, drive stronger growth and create jobs”, OECD Secretary-General Mathias Cormann said. Cormann called on more SMEs to make the digital leap, as digital tools have become crucial for business continuity during the COVID‑19 crisis. 

Meanwhile, the national accounts for Q1 published this week have confirmed a relatively modest decline in GDP as a result of the most recent lockdown. Helped by households reverting to more ‘normal savings behaviour’, the EY ITEM Club expects the economy probably grew by 5% or more in Q2. 

Martin Beck, senior economic advisor to the EY ITEM Club, said the economy emerged from lockdown with a relatively solid base for growth, despite a 1.6% quarter-on-quarter fall in GDP, revised down slightly from the original 1.5% decline estimate. “Even allowing for the boost to output in Q1 from Government spending on COVID-19 testing and vaccinations, the quarter’s contraction was a far cry from the 19.6% quarter-on-quarter fall in output during the first lockdown in Q2 2020. 

However, Beck warned that the delay in removing remaining restrictions and any effect to confidence from the recent rise in COVID-19 infections presented potential risks to this forecast. “But with reports suggesting vaccines look effective at weakening the link between infections and hospitalisations and deaths, the EY ITEM Club currently forecasts that the economy will regain its pre-pandemic size by the end of 2021.”