The Climate of Austerity and Small Businesses - Essay Example

? In a climate of austerity is it right for government to support small business? Inserts His/Her Inserts Grade Inserts Tutor’s Name (15, March, 2011) Introduction There has always been a debate over areas where government should spend money. Some argue more money should be given for welfare purposes. Money given to old and retiree, these people argue, reflects the benevolence of the state towards its citizens. Some argue that money should be delegated for economic purposes and business should be encouraged as they boost the economy. There are also people who advocate that government should not intervene at all and should let the forces of market prevail. So there are many differing opinions about areas where government should or should not spend money of tax payers. In this essay we will argue why governments should support small businesses even in a climate of austerity. It is not only economically but socially also desirable for any economy if small and medium enterprises are encouraged. These small businesses can provide employment and at the same time can boost economy by increasing consumer spending. The arguments against government support to small and medium enterprises will also be studied in order to understand both sides of the debate. There is no doubt that these are tough times for the economy but it is not logical to curb spending in areas that will reap positive cash flows in future. Support for small businesses should be seen as an investment. This is the reason why governments should support small businesses even in a time of economic austerity. Why Government Should Support Small Businesses? This portion of the text will be devoted to the understanding of the reasons for government support of small businesses. There are many reasons why government should support small and medium enterprises. The effect of support to small businesses is seen directly in a country’s economy. Below we will elucidate upon all the benefits of supporting small businesses. The first and foremost advantage of small and medium enterprises is that it increases the gross domestic product (GDP) of the country. The growth of GDP is very important for any economy because it facilitates the development. More GDP will increase government earnings and government will have more to invest in the development of the country. With the support of government small businesses can help an economy increase its GDP. Economists argue that growth of GDP can solve many problems of a country. If economy is growing at a good pace then it is an indicator that the country is going in the right direction. These are tough times for the whole world and countries are still trying to recover from the crisis of 2008. In these times focus of the governments should be on increasing Gross Domestic Product of the country. More GDP means growth and growth in an economy can fight every crisis. It is actually a stimulus for the economy as whole. Small business can help governments do that and the money that is needed for small business support is very small as compared to the other methods of increasing growth. It can be safely concluded that governments should spend money in order to support small business even in a climate of austerity because it will help the economy recover from the very crisis it is going through. The role of government in this regard can be substantial and development and growth of small businesses are dependent upon government policies regarding small and medium enterprises (Li & Matlay, 2006). The best way through which small businesses can help solve problems of any economy is by creating jobs. Unemployment is a very awful thing for an economy because as a result government revenues decrease and more and more people become dependent on the state instead of earning for themselves. The problem of unemployment can be reduced, if not resolved, by supporting small and medium enterprises. These small businesses will provide the people with the job opportunities that they desperately need. Also small businesses have a potential to grow and because of this it is like along tern investment. Small businesses are always looking to expand and that can create more jobs as a result. The growing capability of a large billion dollar corporation may not be as high as small businesses. This means that there is a better chance that small business will need employees in future than a large corporation (Down, S. 2010). This is another reason why governments should support small businesses even in tough economic times. The support to small and medium enterprises will actually help the economy in growing out of the crisis. Jobs creation will lower unemployment rates and will create a cycle that will boost economy. Another potential advantage of small businesses is that it helps raise standard of living of the people. Small businesses are started by people with limited amount of capital and when it grows they get extra money or profits. Small businesses also employ work force and that work force is also paid a salary. All these money helps people raise their standard of living. They buy things that they couldn’t afford before with the extra income they now get. The reason why this is advantageous is that small business owners and employees of small businesses will spend the money they earn. When they will spend they will give other businesses an opportunity to grow. Their expenditure will help the whole economy in this way. A chain reaction like this will happen and extra consumer spending will help the economy in getting back to its normal before crisis positions. Increase in income has many potential benefits for the economy. The extra money is spent or saved. If it is saved then people will keep it in their bank accounts. Banks will invest this extra money and will earn profits. The sector in which the banks will invest will benefit. All in all this chain reaction will benefit the whole economy. The government support to small businesses can help people raise their standard of living. Government will have to spend in this area no matter what the economic situation is because it is not an expense but an investment. It will help the economy come out of the crisis. The chain reaction discussed above can be achieved if small businesses are supported by the government. Small businesses can also give governments revenues in the form of taxes. Government finances its expenditure through taxes and any increase in tax collection can directly result in the increase in revenues to the government. Small businesses if supported and encouraged will give governments a chance to increase its tax revenues. Small and medium enterprises will also not try to avoid taxes like large corporations. The infrastructure of small businesses is very limited so they cannot hide their income in any way. Also newer businesses tend to go by the book and are afraid of doing anything illicit. All in all small business can increase the tax income of a government. It is also easier for governments to look over these small businesses. The resources available to these businesses are limited so vigilance is easy. By financing small and medium enterprises government can increase its tax income in the long run and can also maintain strict watch on their activity. This is another added advantage of supporting small businesses in any country. Consumer demand is also affected by the presence of small and medium enterprises. They provide the customers a wide range of products and services. These small businesses can make the consumer demand more stringent. When there will be more products available manufacturers will try to innovate. They will try to differentiate their product or service from the others and in the process new products and services will come into the market. This will eventually make the demand of the customers more stringent and the domestic industry will flourish. Domestic industries produce product and services that are demanded by the domestic market. If the demand of domestic market will be stringent then sophisticated products will come in the market. This is another big advantage of supporting small and medium enterprises. If the small businesses grow in an economy then it will provide consumers with choices and this will eventually lead to development of local industries. The importance of developed local industries is great. These industries if developed enough can also cater to the international demand. Export oriented economies have done very good in the past 2 decades and this was possible because of growth in small businesses. Actually small businesses can introduce a culture of innovation in the economies. This innovation culture can help the economy. Companies focus on innovation and in the process newer products is produced and in this way companies can sell these products overseas. It is very easy for local firms to sell internationally today so small businesses can also do this. This is another way small businesses can help revive an economy. Small and medium enterprises also increase competition in the economy. Without small businesses large companies can collaborate and can create monopolies. This reduces competition and these large corporations enjoy abnormal profits. If small businesses are not supported by governments then it gives a chance to these large corporations to enjoy abnormal profits. They feel no threat of competition so they seldom innovate. Also they charge high prices from customers and create entry barriers for small businesses. These large corporations can hurt the economy badly because they don’t let the local industry to develop. Because of this governments should support small business. Small businesses, if supported, can increase competition in the domestic markets and as a result these large corporations will have to lower the prices. Also they will have to innovate in order to survive. Small and medium enterprises actually help consumers by lowering prices through competition. Government should also promote entrepreneurship because it provides an avenue for banks to lend their extra liquidity. Small businesses require loans for financing their ventures and these loans mostly come from commercial banks. These banks lend money to these small businesses. The business of the banks is dependent on the interest they receive on loans. Now if banks do not lend money to small and medium enterprises they will have to lend to other sectors. Here lies the problem. If banks invest their extra liquidity into inflated sectors like property and stock markets then it can hurt the economy in the long run (Guanyi, W. 2010). Small businesses can this way help banks diversify their portfolio. Also investment in small businesses can help provide all the above mentioned benefits to the economy. This is an important reason for governments to support small businesses. Favorable policies towards small and medium enterprises can help boost expenditure and will bring stability to the economy of the country. Banks can also benefit from support of small businesses because they can lend money to these small businesses and can earn profits. All the above discussed advantages of small businesses provide more than enough reasons for governments to invest money in small businesses. The UK economy is experiencing tough times now but still the support for small and medium enterprises should not be discontinued. It is not a sector in which government expenditure should be reduced. This sector is actually responsible for reviving the economy so it should be given attention. There can be debate about what policies should be used to encourage small businesses (Minniti, M. 2008). Arguments against Government Support to Small Businesses This section will evaluate the arguments given against the government for supporting small businesses. The main argument given against government support of small business sector is related to the cost of this support. People argue that the cost of support programs for small businesses exceed the benefit they give. Small businesses also carry a certain amount of risk with them and this is another problem associated with them. If these small businesses fail then it will waste government’s money. Other arguments say that if small businesses are supported by government and they are given loans then they may not be able to repay it back. Small business owners have less riding on their business and if they fail then government will have to take the burden. All these arguments have some weight but they do not take facts into account. Small businesses have a potential to revive the economy. They can increase GDP and can contribute to the growth of the economy. The cost of supporting small businesses is therefore not too much. The potential advantages of small businesses exceed their cost. Small business face high risk but small business owners mostly are very careful about their business. Government should shape their support to these businesses in a way that the stake of business owners should be high. This will force them to be very careful. So this impediment can be removed easily. There is no reason for governments for not to support small businesses. Also this support should be substantial. These businesses can solve the problems of the UK economy by increasing employment and by boosting consumer spending. The government should see this support as an investment and not a cost as it will lead to future revenues in the form of taxes and will bring about a chain reaction in the economy that will help the economy revive. Conclusion Small businesses are important for any economy because of their ability to increase Gross Domestic Product and employment. Economy of United Kingdom is going through tough times now and government is trying to decrease its expenditure. But this decrease in expenditure should not be done in support programs for small businesses because this sector is very important in reviving the economy of UK. It will boost consumer spending and will increase competition among the local firms. Banks will also have an avenue where they can lend money if small business sector is supported by government. All in all the support for small businesses is an investment not an expense. Small business can strengthen the culture of innovation in the country and help the domestic demand to be stringent. This will help the domestic industries to prosper in the long run. Also small businesses can increase competition among the firms and this can lower the prices for customers. All in all the potential advantages of small businesses make it more than desirable for UK government to support small and medium enterprises. Bibliography Down, S. 2010. Enterprise, Entrepreneurship and Small Business, London: Sage.  Guanyi, W. 2010. With government support, SME potential is vast. China Daily. Accessed on March 15, 2010 http://www.chinadaily.com.cn/hkedition/2010-07/31/content_11075263.htm Li, J. & Matlay, H. 2006. Chinese entrepreneurship and small business development: an overview and research agenda. Journal of Small Business and Enterprise Development, 13(2), pp.248 – 262. Minniti, M. 2008. The Role of Government Policy on Entrepreneurial Activity: Productive, Unproductive, or Destructive? Entrepreneurship Theory and Practice, 32(5), pp. 779-790. Read More