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Westminster Hall

Tuesday 6 November 2001

[Sir Alan Haselhurst in the Chair]

Small Business (Regulatory Burden)

Motion made, and Question proposed, That the sitting be now adjourned.—[Mrs. McGuire.]

9.30 am

Mr. Mark Prisk (Hertford and Stortford): I am most grateful for the opportunity to speak about the needs of small businesses and the burden of regulation that they bear. I initiated the debate for three reasons. First, I spent the whole of the past 10 years running my own business, before coming to this place in June, so I hope that I can bring a practical rather than a theoretical or academic approach to the subject of the needs of small firms. If I have learned one thing, it is that small businesses are not so much about the bottom line, the economy and finance; they are essentially about people. That difference is crucial.

My second reason for securing the debate is that, in my constituency, small businesses generate a much larger proportion of the local wealth and jobs than is usual in most constituencies. In most of the market towns and villages in my constituency, the small firms, entrepreneurs and local tradesmen provide the goods and services on which most of my constituents rely. That is one reason why I established the East Hertfordshire Business Forum at the beginning of last year, with the express intention of providing practical help for local businesses. I am pleased to say that one of our initiatives, the prompt payment commitment, is directly tackling the scourge of late payment of bills.

My third reason for raising the issue of small businesses is that we need to speak up for small businesses now, more than ever. We must reduce bureaucratic burdens and lower financial hurdles, because it is at a time such as this, as the economy falters, that those enterprises will help us avoid a long and lasting recession.

Those who refer to small business may be unclear in their mind as to what it is. All politicians and all members of the media happily use the phrase to cover a wide variety of enterprises and work. The first example that I shall give of a small business is that of someone who is self-employed, a sole trader or a freelance. There are now 4 million self-employed people in Britain. Sadly, the Government's determination to push through the IR35 proposal has badly undermined their expectations about working in this country. In the few days since the announcement of the debate, I have received dozens of e-mails, letters and representations about the concerns of that group. One of my constituents, Mr. Paul Granger of Hovecraft Services, based in Bishop's Stortford, cites the iniquity of the tax burden placed on him by IR35. He concludes:

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My second example of small business is the microbusiness. Such businesses are usually partnerships or companies that employ up to 10 staff. They make up the vast majority of the shops and local tradesmen upon which we all rely. For them, the marginal cost of employing people is critical in determining whether they can survive as a business. Another example from my constituency is that of Mrs. Moy, a newsagent in Hertford—we have many excellent newsagents—whom I met. The new regulations regarding rights for part-time staff have effectively doubled her staffing costs; however, she has no prospect of being able to recoup those costs.

Once we have talked about the self-employed and microbusinesses, it is only then that we come to what most people think of as a small business: a limited company, usually employing between 11 and 50 people, which is often a family business in manufacturing or the service sector. All those forms of enterprise—whether self-employed, microbusiness or small, and whether they operate as a limited company, partnership or sole trader—are distinct. The failure of Governments, at all levels over the years, to distinguish accurately between the different types of enterprise is one reason why so many Government policies, well intentioned or otherwise, prove disastrous in practice.

Small businesses in all their forms are vital to the economy and community. They provide almost half of all private sector jobs and many local services, particularly in deprived or rural areas where large companies will not venture. They often create the innovative approach to a market, a good example being Mr. James Dyson and his attempts to revolutionise the vacuum cleaner market when other companies saw it as mature and stale. Small businesses offer also a message of hope. It does not matter who people are, their background or education, their colour, creed or race; if they have the ability, ambition and will to work, they can be their own boss and make their own way in the world. Looking at what the organisations that represent those firms have said, that message is one to which an increasing number of people aspire.

Sadly, today small businesses are struggling. The result is that our national competitiveness is falling away rapidly. In 1997, we were the ninth most competitive nation in the world; today we are the 19th, and I believe that that position is under question. Why is our nation's economy failing to compete? Whenever I talk to my constituents and small businesses, or examine the regular surveys by the Federation of Small Businesses, the Forum of Private Business or the Small Business Bureau, I conclude that the answer is always the burden of regulation. We are facing a rising tide of regulation domestically and from the European Union. Last year alone, a record 3,865 regulations were passed. The sheer volume of those rules, the systems that underpin them and the time and money costs of implementation mean that small businesses are struggling to keep ahead.

It might be said that one year of record regulations is not the end, but the problem is not just one year. It followed on from a £15 billion cost of additional red tape, which the British Chambers of Commerce cited as the cost of Labour's first four years in government. If the volume of regulations were not bad enough, the Government compound the problem by the way in which they are introduced. There is often little warning

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or preparation time. Several businesses in my constituency cited just three weeks as the time that they had in which to deal with all the national minimum wage information. The rules are sometimes contradictory, and now we find that small businesses are no longer expected simply to abide by regulations and rules, but are expected to administer them.

As I was a small business man, I know that we have been unpaid tax collectors for many years—for value added tax, for example. Now we are expected to be the unpaid benefits office, given the raft of new payroll regulations. The stakeholder pension scheme has a recurring administrative cost of £15 million, and the working families tax credit scheme has an annual cost of £105 million. The student loan repayment scheme has recurring costs of £210 million, and the national minimum wage has costs to business of £330 million, not including extra money that goes into people's pay packets. Those are not my figures; they are not even the figures of the British Chambers of Commerce. They are the Government's figures. I shall take one example from that list to explain how small businesses are directly affected. When the Government originally costed the working families tax credit, they allowed £40 million for one-off set-up costs, followed by £105 million per annum for recurring costs to business. Some people said that those were quite small, and reasonable costs compared with those of the European social chapter, although I was not convinced.

However, the Government and some experts failed to recognise that payroll compliance costs always hit the smallest firms hardest. Indeed, the Government's own better regulation taskforce said not only that the scheme directly hit small firms' cash flow—the lifeblood of any business—but £25 million of compliance costs fell on the smallest firms, which employ just one to four people.

Perhaps worst of all is the fact that, according to Lord Haskins's report,

and complying with—

Mr. Bill Wiggin (Leominster): Last week, I sold my car. While waiting to receive payment for it, I chatted to the person running the small car company to whom I had sold it. He said that he spent less than 10 per cent. of his time buying and selling cars; the rest was spent managing his business. The largest part of that management involves the administration of all the new regulations of which he has to be aware, even though the company has, I believe, fewer than four employees.

Mr. Prisk : I am grateful to my hon. Friend for that classic example of the way in which small businesses that are trying to make a contribution to their local communities find the burden of administration too much. It is a good example, which reinforces the fact that Government policies, intentionally or otherwise, disproportionately affect small businesses, diverting

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them from creating wealth and providing efficient services. Given that such businesses generate 37 per cent. of our gross national product and employ 44 per cent. of private sector workers, the burden of regulations directly impinges on the efficiency of our national economy.

However, there is also a social dimension. I have long been a strong supporter of citizens advice bureaux, and my constituency is fortunate enough to have several excellent bureaux. I was particularly concerned to read the national association's report back in February, which explains, worryingly, how the working families tax credit has backfired for many of the more vulnerable applicants:

Mr. David Harker, the chief executive, concludes that

I am aware that the Government have appointed Mr. Patrick Carter to review payroll regulations and make them more effective and less costly. I understand that Ministers have had Mr. Carter's report for a little while, so I urge them to publish the findings, or at least bring them to the House's attention, to allow us to debate them quickly, not least because it is important to make changes as quickly as we can as the economy declines.

There are several solutions to the problem. In the United States, for example, small companies are able to retain a percentage of the sales tax that they collect on the Government's behalf. In some ways, that compensates companies for the administrative costs.

Does the Minister agree with the taskforce that the working families tax credit disproportionately hurts small businesses? Will he accept that it reduces their productivity and therefore national competitiveness? Does the Minister recognise the potential impact on jobs if red tape deters microbusinesses from taking on people such as Mrs. Moy in Hertford and thousands of others like her? Most important, will the small business Minister and his colleagues heed my call to recognise, financially or otherwise, the burden that the scheme places on small businesses?

Sadly, the working families tax credit will not be the last subject for employment-related regulation. Others expected in the next few months include entitlements to enhanced maternity, paternity and adoption leave, the EU White Paper on environmental liability and the EU directive on the exposure of workers to vibrations. Business is rightly sceptical of a Government who promise support and help, for they seek action, not words.

We wish the new Minister well and we hope that he will succeed, because the future of small businesses is in my mind in this debate. I hope that the Minister will answer my questions today.

The Minister is up against the culture of governance; there is little contact with or understanding of small businesses and family firms, let alone the self-employed. For example, the IR35 measure passed by the

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Government represents twice the annual budget of the Small Business Service for which the Minister is responsible. In truth, our regulatory culture is, as Lord Haskins, said, inherently autocratic, inflexible and remote. Mr. Digby Jones of the Confederation of British Industry said yesterday that even big companies are now feeling the pressure.

On Friday Mr. Rupert Murdoch, with whom I believe the Government are familiar, complained about red tape and said that Britain

If a multi-million pound business is struggling, what hope is there for family businesses and small firms in my constituency and those of other hon. Members?

In the long term, we seek a complete change of culture in government. They should recognise that what enterprise needs is not a better regulation taskforce but less regulation. What we need is not more means testing but a simple, efficient tax system; we want not to collect taxes or run the welfare state on the Government's behalf, but to be free to create jobs and wealth, without which there would be no Government.

Mr. Deputy Speaker : It is customary for hon. Members seeking to catch the eye of the Chair to rise in their places.

9.48 am

John Mann (Bassetlaw): I declare an interest: I am part-owner of a family microbusiness, which has self-employed people and which negotiated in respect of IR35 with the Inland Revenue on behalf of our sector of industry. The business employs a lot of part-time staff and casual staff.

I have listened to the debate with the utmost incredulity. I considered intervening to ask that the support for, and success of, small business under the last Tory Government be compared with that under Labour Governments since 1997. I set up my business under a Labour Government and the issue of regulation and red tape is a puzzle to me. I am a member of two chambers of commerce and I speak regularly with business in my constituency and beyond. Businesses tell me of subjects on which they would like to press the Minister—and, indeed, the Chancellor—and I shall discuss those in a moment. Regulation, however, is not an issue that comes up regularly.

I want to deal with the specifics, so let me deal with vibration, which is a wonderful example because regulation has not yet been introduced. Historically, the largest industry in my constituency has been coalmining. The next largest is manufacturing. One of the areas that I have been forced to specialise in is vibration white finger. Many compensation claims arose as people went to court retrospectively to sue their employers for failing to recognise a health and safety hazard.

The regulations that have impacted on my business include precisely those health and safety regulations kindly introduced between 1992 and 1997. I have no criticism of the major ones—such as the Manual Handling Operations Regulations 1992, which are

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fundamental in protecting small businesses against potential compensation claims from employees, casual or permanent. The raft of legislation on electrical installation—part of our business—is another protection for the employer against bad practice by both employer and employee. It was introduced between 1992 and 1997 and continued subsequently by successive Governments. Once again, I applaud that. The bulk of the regulations introduced in this country over the past decade are entirely right and proper.

The working families tax credit is another example. Some employers tell me, somewhat tongue in cheek, that it supports the employer. Why? Because if someone is paid such a low wage that they are entitled to the working families tax credit, the employee, having received additional finance from the state, is more likely to stay with the company. The one criticism that could be made is that it is subsidising the poor-paying employer, precisely the small business person who, at great expense of time, effort and finance, is trying to build a successful business. Representatives of businesses tell me that the working families tax credit is a major bonus to such employers, and they are right.

A third example—

Mr. Philip Hammond (Runnymede and Weybridge): The hon. Gentleman is missing the point. It is not whether the working families tax credit is good or bad, but whether the method that the Government selected for paying it—using businesses as unpaid welfare delivery mechanisms—is the right or wrong way to deliver that benefit.

John Mann : I must disagree with the hon. Gentleman. Whether the working families tax credit is a good thing is the main issue. By definition, the tax credit supports working, not non-working families. The linkage with the employer is coherent and sensible.

The national minimum wage is a third example. My business and the vast majority of businesses welcome the national minimum wage. It was welcome in my industry because we were sick to death of cowboy employers paying next to nothing—cash in hand if they could get away with it—undercutting us on the minimums. The national minimum wage has allowed our industry to push rates up. The largest sector of small business that I deal with regularly is hairdressing and associated professional bodies. In that sector, the introduction of the minimum wage is raising standards—we have the best hair designers in the world—but in the past it has been a low-skill, low-pay, low-cost industry comprising more than 70,000 different small businesses. The national minimum wage is raising standards so that our role as world leaders in design capability translates into the product delivered to the customer. For the first time, those paying the national minimum wage and above are on a level playing field.

The real issue is the significant improvements that the Government could continue to make. I shall list four of them. First, the Government have, rightly, increased VAT thresholds at least twice since 1997. If that trend continued, it would be a major asset to the growing small business. I hope that the Minister conveys that message to the Chancellor, as it is a critical issue for consideration.

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The second improvement that the Government could make concerns capital allowances, which, in the current tax regime for small businesses, are not as fundamental as they were because, with the 10p starting rate and the cut in small business tax, a significantly greater amount is already available—as the profits of my company demonstrate over that period. Nevertheless, the link between paying tax, available resources and capital investment exists in the mind of the small business person. The Government should make far greater use of capital allowances of the type used for computer and IT equipment, with 100 per cent. write-off, to encourage small business capital investment. I hope that my hon. Friend the Minister will also convey that message to the Chancellor.

The third improvement that the Government could make concerns rate rebates for small businesses. They have slowly begun to have a major impact, particularly in the rural sector, where I live. What does the Minister propose to do to ensure that the existing arrangements are properly communicated to those who run businesses? My experience is that we have a raft of good policies for the rural small business—which is all too often not aware of them. To save time, Mr. Deputy Speaker, I will not cite examples of those policies, although there is a raft of them.

Mr. Wiggin : On a point of order, Mr. Deputy Speaker. Could you confirm the correct way in which we should address you?

Mr. Deputy Speaker : The correct form of address to the Chair at the moment is "Mr. Deputy Speaker". Chairmen who are not Deputy Speakers of the House are addressed by name or as Mr. Chairman, as will be made clear at any changeover.

John Mann : Thank you, Mr. Deputy Speaker.

My final point is the most fundamental for small business. I thank the hon. Member for Hertford and Stortford (Mr. Prisk) for initiating the debate and raising the issue of the Government's small business culture. One fundamental change is required for small business: a change to the culture of the banking system. The greatest barrier to the establishment and success of small businesses is the culture whereby banks refuse to take rational decisions. Yesterday I filled in a questionnaire that asked me to comment on 10 banks. They are all the same. In my experience, they are all as bad as one another. There is no good example among them. How does the Minister propose to tackle the culture whereby banks rip off businesses for short-term profit, at the expense of the longer-term growth of the British economy and of the banking system?

9.58 am

Mr. John Baron (Billericay): Thank you, Mr. Deputy Speaker, for giving me the opportunity to speak on this important subject.

We all know that actions speak louder than words. One reason why politics lacks credibility today is the perception that politicians say one thing and do another. A good example of that is the fact that there is

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no shortage of pro-business speeches and noises from the Government, yet they continue to make life difficult for business, especially small business. I should declare an interest because I am a small business man.

We heard from my hon. Friend the Member for Hertford and Stortford (Mr. Prisk) that, according to British Chambers of Commerce figures, red tape costs have increased by £15 billion during Labour's first term. There is no getting away from that fact. Industry itself is complaining about the burden of red tape, regardless of what the hon. Member for Bassetlaw (John Mann) just said. As the Federation of Small Businesses has made clear, the burden of red tape always falls disproportionately on small firms. Figures from the Institute of Chartered Accountants show that the cost to small businesses of implementing new legislation doubled in the period 1999 to 2000. That is a meaningful cost to small businesses.

Regulation and red tape have hit small businesses hard. Entrepreneurs in my constituency are concerned about that. We should be too, because small businesses are the lifeblood of the economy, accounting for something like 99 per cent. of all businesses and nearly half of all employment, as my hon. Friend intimated. If we strangle enterprise in the small business community, we inhibit the prosperity of the country as a whole. Indeed, one of the main reasons why I am a Conservative is that I believe that the relief of poverty should be one of the key objectives of politics. That can be better brought about if we foster personal freedoms within the rule of the law, encourage enterprise and allow businesses—especially small businesses—to breathe and thrive.

Such an approach will create a more prosperous economy and create more wealth from which the Government can take their rightful share to help the truly disadvantaged in society. That will not happen if the Government pile regulations and costs on to businesses as that will hinder enterprise and eventually our ability to help those most in need. Yet the Government continue to make life difficult for entrepreneurs. The rising tide of regulation and red tape originates essentially from two sources. A good chunk is home grown and results from a natural tendency of politicians and bureaucrats to try to solve all problems with more and more regulation. The second source is the European Union. That situation will get gradually worse with the spread of majority voting. I should like to focus on that second danger for a moment or two.

To illustrate the growing danger posed by the EU's obsession with uniformity, I would highlight the prospectus directive because of the immense damage it could cause our small growing companies. That directive will harmonise listing rules across Europe, ensuring that issues of shares, bonds and derivatives should be accompanied by a prospectus. The fear is that the additional red tape could add something like £70,000 to £100,000 to the listing cost of each company, no matter how small. That would particularly hit small businesses, as their cost of raising capital would be increased significantly.

Prior to being elected to this place in June, I was a fund manager in the City, often investing in small businesses that raised capital in the financial markets, and I can vouch for how important it is for small businesses to have access to cheap capital from flexible

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financial markets. Meanwhile, as reported in the Financial Times, there is also a fear that in seeking to raise the disclosure standards of all companies, the directive could hit second-tier markets such as the London stock exchange's AIM and OFEX markets. Those markets have lower disclosure requirements to encourage young companies without extensive trading histories to raise capital.

They have been phenomenally successful in achieving that goal. AIM is the London stock exchange's market for growing companies and is obviously aimed at the smaller end of the market. Since its launch in 1995 it has helped something like 750 companies raise nearly £7 billion of equity capital. It has become a vital part of the UK economy in channelling public equity capital to younger companies. That market would not survive this directive. That is the view of private industry itself.

The problem is that the directive is the product of an EU Commission which has not consulted widely on the proposal and which did not take full account of the reality of how Europe's capital markets work. It is little wonder that private industry is unhappy, yet the response from the authorities to complaints about the directive has been disappointing, to say the least. In August, representatives of the London stock exchange, Barclays bank, OFEX, AIM, Brown Shipley merchant bank and the Quoted Companies Alliance attended a meeting at the Treasury to voice their concerns. They were hoping to meet senior officials but, instead, were met only by a junior official. As reported in The Daily Telegraph, one representative said:

Apparently, a Treasury spokesman responded and said that it must be accepted that the policy will go ahead.

The EU's response has been extremely disappointing. After it was criticised for producing its "one size fits all" prospectus directive without consultation, a spokesman for Frits Bolkestein, the EU Internal Market Commissioner, said, again courtesy of The Daily Telegraph:

That last statement beggars belief. We seem to have faceless, unaccountable bureaucrats setting deadlines on policies, irrespective of what harm they will do to small businesses and secondary markets, while the Government look on. It confirms to many that London's interests come a poor second to the EU Commission's quest for Euro-uniformity.

I now return to the difference between words and actions. Both the Prime Minister and the Chancellor recently expressed admiration for the success of American enterprise as characterised by low taxes, low regulation and individual initiative. In reality, however, we are moving towards a high-tax, high-regulation EU model which is run by bureaucrats. The language is that of American enterprise; the reality is EU regulation. As my hon. Friend the Member for Hertford and Stortford said, the adoption of the EU model is beginning to have a detrimental effect on our economic performance. Productivity growth has slowed. The United Kingdom has fallen in the world competitiveness league table and, meanwhile, economic growth is slowing down and the balance of payments is showing a record deficit. That does not bode well for the future.

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I urge the Government to do all that they can to block the prospectus directive and to re-examine their approach to regulation in respect of small businesses. We should be moving closer to the American model, not the EU model. Actions speak louder than words and we must act now to ensure that we do not stifle Britain's entrepreneurial spirit and, with it, our prosperity over the longer term.

10.7 am

Mr. Mark Field (Cities of London and Westminster): I agree almost four square with the philosophical outlook of my hon. Friend the Member for Billericay (Mr. Baron). He summed up the position nicely by saying that we should be moving towards the United States model rather than a European-type model in respect of small businesses. As a former small business man, I do not need to make a declaration because, within a few months of the general election in June, I was bought out of the business that I set up eight years ago. The Minister may think that it is curious that a phalanx of small business people who want to extol the virtues of such a wonderful life have now decided to go to the public sector, courtesy in part of the electorate. None the less, that means that we have a strong contribution to make to such a debate. Furthermore, ours will be an on-going contribution in the months and years ahead.

I want to concentrate on the more practical aspects of this important issue. No one wants to talk us into a recession, but clearly matters will be a little more difficult in the next few years than they have been in the past half a decade or so. I agree with my hon. Friend the Member for Hertford and Stortford (Mr. Prisk) who said that, as the economy begins to struggle and turn down, we need to speak up for—without overly interfering with—small business. He had statistics, such as the fact that there are 4 million or so sole traders and microbusinesses, at his fingertips as well as details of small businesses such as the one that I ended up running. I set it up with a partner, and by the time that I left it, about eight years into running it, we had a dozen staff and a turnover of a little more than £2 million. I identify with some genuine anxieties, especially in the final two or three years, relating to payroll issues and that of the unpaid tax collector, to which my hon. Friend the Member for Hertford and Stortford referred. Many small business people feel that they are long-term Government employees in that respect.

I calculated that for every pound that I brought into the economy, 64p went in tax—if all taxes were counted, including value added tax, corporation tax, my slug of income tax and the employer's national insurance stamp. A significant amount is involved. For every pound that a small business man earns, he can keep only 36p, with more or less two thirds going elsewhere. That tax regime was in place before 1997, as I am sure that the hon. Member for Bassetlaw (John Mann) would be the first to remind me, and I welcome some of the measures introduced in the past four or five years. We now have a more sensible capital gains tax regime, although it has recently become rather more complex. I hope that many Opposition Members would agree with some of the actions of the Chancellor of the Exchequer and, by extension, of the Minister's Department.

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One of the main concerns at a practical level that many people in small business now share is that we should strike a balance between, on one hand, achieving a work-life balance and considering small business issues in terms of employee rights—to which the hon. Member for Bassetlaw alluded—and on the other, introducing what they would regard as red tape. We must achieve a balance as far as possible, and in my view there has to be a demand for less regulation.

There is a perception that, in my constituency, Cities of London and Westminster—the constituency in which we are today—all the industries are large multinationals. My hon. Friend the Member for Billericay discussed some of the largest institutions in the City of London and some of their anxieties. Equally, however, there are many small, often family-owned businesses based in the constituency, and they have many common small business concerns. Obviously, they have some London-based anxieties relating to congestion and the sheer cost of housing, which means that attracting employees can be an issue, and some fundamental infrastructure issues are involved, especially in relation to transport. Nevertheless, some genuine worries are close to the hearts of people who run businesses here. Payroll issues, in particular, have become ever more prevalent in recent years, as a result of the Employment Relations Act 1999 and the fact that, increasingly, smaller businesses do not have the infrastructure for a large marketing department or, perhaps, even a human resources or payroll department, yet have to deal with complex specialist paperwork.

My business was a classic in that mode. We were not sufficiently well off to employ people full-time, and we had to take consulting advice on payroll aspects. Ultimately, however, much of the burden fell on me and my fellow director. I shall be honest about this: there were concerns. We had a small and relatively young business and, given that at one time two of our four female employees were on maternity leave, it had to make us think twice about whether we could employ more youngish women who might well be considering having a family. Obviously, the increasing amount of paternity leave is an on-going concern, especially for smaller businesses, as employees can be out of the picture for some six months. Long-term plans cannot be made about employing a replacement, lest the employee decides to return. We wanted to employ graduates, but it was very much a factor in our mind that, as the payroll aspects of graduate tax provision were being put back in the hands of small business people, doing so really would have totted up costs.

I do not suggest that there should be a moratorium or free rein in this respect for small businesses. I understand that, as the Minister would rightly say, it would give companies at the cut-off point of, say, 20 or 25 employees a strong disincentive to grow if suddenly they faced new regulation from which they had previously been exempt. The point was well made by the hon. Member for Bassetlaw. He placed the blame for many of the woes of small businesses on the banking system, and more concerns would arise with regard to that if the economy were to enter a recession. Many banks would react to that situation by looking after their own interests and by watching what other banks

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were doing. If they responded in that manner, they would be reacting in a rational economic way, rather than misbehaving, but important concerns might arise with regard to cash flow. Assistance, such as tax exemptions, or allowing for certain taxes and rates to be paid on a longer-term basis, would be well received, especially in respect of smaller, relatively new, start-up businesses.

The debate has been useful, and I congratulate my hon. Friend the Member for Hertford and Stortford on raising the issue under discussion higher up the political agenda. However, time is running out, and those in the Chamber will now wish to hear from the Minister.


Brian Cotter (Weston-super-Mare): I thank the hon. Member for Hertford and Stortford (Mr. Prisk) for providing us with another opportunity to discuss small businesses, which are an integral part of every community. I still run a small business—that interest has been fully declared. My practical experience gives me a special understanding of many of the issues under discussion—I am sure that other hon. Members who have business connections will agree with me about that—and I hope to be able to share some of my knowledge with the Minister.

Several issues that were raised by the hon. Member for Hertford and Stortford have been addressed in the debate. I was glad that he mentioned the important matter of the prompt payment of bills. The Government's introduction, a few years ago, of regulations on that matter was welcomed by many hon. Members, but how well they have been implemented has always been a concern. However, I am glad to learn that, locally, the matter has been taken on board.

Mr. Prisk : The hon. Gentleman is right to state that that is an important issue. One of my concerns about the Government's proposals is that it is not enough simply to pass legislation. The problem for small suppliers is that, if they have a large customer, they will not want to upset that relationship. Consequently, they will not use the Government's legislation, as has been shown by the evidence to date. In that regard, the legislation misses the point. I would welcome the hon. Gentleman's comments on that issue.

Brian Cotter : That is a fair point. However, if legislation were never introduced, one would never make a start down the right road. The legislation has led to a gradual change in culture. I do not know precisely about the current situation, but I believe that large companies should be required to declare their record on the payment of bills, as should the Government. I spoke when the legislation was introduced, and even then I was disappointed that the Government were trailing behind. Essentially, the Government were telling companies what to do while failing swiftly to implement their own legislation. As hon. Members have said, local government is particularly guilty of that practice.

The issues that have been raised with regard to rural areas are important, and there is still a lot of work to be done on them, particularly following the foot and mouth crisis. Other issues, such as of sub-post offices, also need further attention. Hon. Members are

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increasingly looking to the Government to deliver through the regional development agency system. Ministers are talking about investing more money in the system next year, or the year after, and increased investment in regional development agencies would be welcome because they did not receive enough funding when they were established. In future, like many other hon. Members, I shall be looking to the regional development agencies to introduce more initiatives to help rural areas.

The hon. Member for Bassetlaw (John Mann) made some good points. He mentioned, for example, the working families tax credit, which we all welcome. However, we also look to the Government to do something about the burden that they have placed on the small companies that must implement the credit. The initiative is good and worthwhile, but we want help for business to be implemented by the Government rather than by business.

The hon. Member for Bassetlaw also mentioned business rates, an issue that is important and high on the small business agenda. I wait with increasingly bated breath for the Government to bring forward a scheme to help small businesses with business rates. I do not know whether my breath will continue to be bated today or whether I will get satisfaction. I ask the Minister to respond here and now to the programme that the Liberal Democrats have proposed: a business rate allowance that is easy to implement with no red tape and that leads to an immediate reduction in small businesses' business rates. If the Minister does not know the full details of the proposal, I shall send them to him. I cannot understand why such a worthwhile initiative cannot be adopted.

The hon. Member for Billericay (Mr. Baron) made some good points on the prospectus directive. I am in touch with the rapporteur in the European Parliament on the matter, and he has taken on board the points that I made and those of the type mentioned by the hon. Gentleman. We hope that the directive will bed down as a reasonable regulation.

We all know the important role that small firms play in our society, economically and socially. It does not take much to figure out that it is in the Government's interest and in all our interests to ensure that small businesses are allowed to fulfil their potential without being weighed down by excessive regulations. I disagreed with the hon. Member for Bassetlaw when he said that that matter was not a high priority for many people. Respected surveys by bodies such as the Federation of Small Businesses, the Forum of Private Business and the Institute of Chartered Accountants state time and again that the matter is problematic.

The Government pledged to think small first. We plead that that pledge should lead to real action, rather than simply being a pious hope. There is still some way to go before small firms cease to be strangled by regulatory red tape, which prevents them from getting on with the business of running their business. A recent survey by the Institute of Chartered Accountants said that, since last year, the average compliance cost for microbusinesses had increased from £3,600 to £4,100. That is a discernible increase. In the small business sector as a whole, the average cost has increased from

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£8,000 to more than £10,000. We must respect those figures and the Government must take them into account.

Given the Government's record, it is unsurprising that small businesses remain unimpressed by their rhetoric. Seventy-five per cent. of respondents to the Institute of Chartered Accountants survey said that the Government had not done enough to encourage enterprise culture.

Mr. Wiggin : The hon. Gentleman is probably as familiar as I am with the fact that huge numbers of small businesses in his constituency run tourist-driven activities, such as bed and breakfasts and small hotels. Given that the money available for tourism has been disproportionately spread to Scotland and Wales, does he lament, as I do, the Government's lack of funding and support for struggling small businesses that are trying to attract tourists to England—especially to the seaside—in the aftermath of the foot and mouth crisis? I hope that he will support me in asking the Government to divert more funds to increase funding for tourism support.

Brian Cotter : I happily support the hon. Gentleman in that request, although Conservative Members have not produced a significantly better programme on the issue than have the Government. However, I shall raise those issues with the Minister for Tourism, Film and Broadcasting when he comes to Weston-super-Mare on Thursday.

There is a fine line between achieving good standards for employees and not putting too great a burden on the employer. The annual report of the better regulation taskforce states:

That is a definitively important statement, which the Government should observe when dealing with business. That is what all regulation should be about, as Lord Haskins said in his report. However, if we use that test to judge some of the regulations that the Government have introduced, we find that they have failed to meet it time and again.

Do the provisions for stakeholder pensions, for example, fulfil the objectives to which I referred? No, they certainly do not. In a recent written answer, the Secretary of State for Work and Pensions admitted that, by the end of August, only 146,950 employers had designated a scheme for their employees out of a total of up to 400,000 employers that were in line to do so by 8 October. The take-up rate has been decidedly low because of concerns about the scheme and its past performance. The Government seem resigned to the fact that there is concern about stakeholder pensions. The Department for Work and Pensions announced another pensions review just two weeks before employers could have been fined for not having a stakeholder pension scheme in place. That is an important point for the Minister to bear in mind.

The new regulations on the issue also fall short of the good regulation test because they place an impossible burden on smaller employers—the microbusinesses—

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who must identify a scheme and administer it through the payroll. Once again, small firms are carrying out the work of Government and being forced to undertake roles that should never have been placed within their remit. I ask the Minister to consider that important point. The point applies also to the working families tax credit, which I mentioned earlier.

No small business owner would dream of asking the Minister to mind the counter of his shop—although it might be a good idea if the Minister were to do so. Instead of grandiose schemes whereby people work for Shell for a couple of years and enjoy all the benefits of such big companies, the Minister, Members of Parliament and especially civil servants should get down to the nitty-gritty and work for two, three or four days in a small business—a garage, for instance—slog away and go home late at night to calculate VAT.

The climate change levy is another important issue. Many firms of all sizes are concerned about it because it is complicated and cumbersome. I also draw special attention to the lack of consultation on the working time regulations. Although those regulations are supposed to be extended and better operated, that has not yet happened.

I seek several reassurances from the Minister on behalf of small businesses. A key to achieving regulation that complies with the model set out by the better regulation taskforce is to understand the needs of small firms. The Minister would do well to read, on the British Chambers of Commerce website, the comments made in reply to its campaign to cut red tape. A gentleman called Henry, for example, runs a business that is based on the internet and e-commerce, and his comments on the website neatly summarise the way in which many people have been affected by the IR35 legislation.

Many small firms have no idea of the regulatory requirements facing them. I ask the Minister to ensure that the communication process between small firms is improved, perhaps by using the Small Business Service. What action are the Government considering to ensure the effectiveness of legislation passed by the House? I ask the Minister to press for an immediate review of legislation that places unnecessary burdens on small firms. I would also like him to guarantee that further legislation will not be introduced to the detriment of small firms, particularly as we look ahead to the tax credits coming on line in 2003. Finally, when will the Minister respond to the detail of the Competition Commission report on banking, which has been on the table for nine months? We have yet to hear a response.

10.31 am

Mr. Philip Hammond (Runnymede and Weybridge): I congratulate my hon. Friend the Member for Hertford and Stortford (Mr. Prisk) on securing the debate. He is eminently qualified to raise the subject of small business and so too, it appears, are other hon. Members who have contributed this morning. I declare my interest as a director of two companies, both of which, I think, would qualify as small businesses under the official definition.

I want to set the subject in a wider context. Over the past couple of months, political focus has been on wider issues: foreign affairs and our country's ability to defend

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itself. Before that, the political flavour of the month was public services and an agenda for making them better and more effective. Those legitimate activities of Government and the social state critically depend on the ability of our productive enterprises to generate the wealth that underpins them. Business is critical to the success of our society and small businesses play a significant role in our economy.

Already, we have heard about the 3.7 million enterprises that exist in this country. More than 99 per cent. of those employ fewer than 50 employees. Some 44 per cent. of all non-governmental employees are in the small business sector and 37 per cent. of private sector turnover is generated in that sector. The sector not only represents a significant proportion of the total economy but performs an important role in delivering flexibility to the economy. That is the reason for the concern about the burden of increased regulation on small businesses.

The term "small businesses" embraces a range of enterprise sizes, as my hon. Friend said. Clearly, some small businesses are growing and seeking to accumulate capital; they may, in time, become medium enterprises. However, a large number of small businesses will never be anything other than just that. Many of them are one-man, self-employed enterprises. They, in particular, deliver a swing capability to our economy that is vital to the fast-moving responsiveness that we need if we are to continue to be flexible.

I am sure that the Chancellor would recognise that as the economy and the fortunes of firms move, they must be able to adjust the costs that they bear. The one-man business is uniquely able to adjust its cost in response to the changing environment; it makes more money one year, less the next. Typically, such a business will not require large streams of investment capability, so it can absorb changes in the environment in a way that larger and more structured businesses cannot. The price that small enterprises pay is a much higher rate of enterprise failure than is seen among larger enterprises, which is balanced by a faster rate of enterprise creation. We need to focus on the flexibility that microbusinesses and small businesses deliver because they provide a unique adjustment factor in the economy. One reason why the Government's IR35 initiative has been so damaging and destructive is the fact that it has hit at the most flexible part of the economy.

The Chancellor, whom I am happy to quote again, always talks about improvements to productivity being the key to our future success. I have been struck by a report by a New York organisation called the Conference Board, which analyses the productivity gap from the United States perspective. I shall quote from the executive summary—I could not afford the full report because it costs $1,000 and parliamentary resources do not stretch that far.

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In other words, the report points out that industry's flexibility to adapt its working practices and reallocate labour and capital is a critical factor in obtaining the huge gains in productivity that the development of IT can offer. That is precisely where the regulatory burdens that are being imposed on business may impair our ability to realise those productivity gains.

Mr. Andrew Love (Edmonton): I thank the hon. Gentleman for giving way. I apologise to you, Mr. Cook, for my late arrival. That was occasioned by my attendance at a sitting of the Select Committee on Deregulation and Regulatory Reform, where we are trying to deal with the issue of the regulatory burden, which seems to have been a theme of Opposition Members' speeches today. I should like to ask the Opposition spokesman where he would lighten the regulatory burden. There have been comments on the working families tax credit, hints about the minimum wage and talk about stakeholder pensions. Will the hon. Gentleman give us specific examples of ways in which he would lighten the regulatory burden on small businesses?

Mr. Hammond : If the hon. Gentleman will allow me to make my remarks, I shall make several specific suggestions, to which I hope that the Minister will respond.

Many burdens that we have discussed this morning obviously affect businesses of all sizes. However, as has been said, some burdens will affect small businesses and larger businesses differently. Smaller businesses have limited manpower resources and, because of the indivisibility of individual units of labour, they cannot afford to have specialists dealing with all the different areas of regulation that the Government impose on them, so the issue becomes particularly acute for them.

I readily acknowledge that there is a problem for Government in dealing with smaller businesses. It is difficult for an organisation of the scale of the Government to engage with the vast array of different interests and agendas that smaller businesses will have. I welcome some of the Government's moves to encourage and foster enterprise in small business, and in particular the changes to the capital gains tax regime. Much of the Government's agenda focuses on delivering to businesses support services such as the Small Business Service, yet they continue to impose increasing levels of burdens through regulations. The Labour approach is based on lots more regulatory burden dealt with by lots more intervention in the form of innovations such as the Small Business Service. I should prefer a lighter-touch approach that does not try to counter the effects of regulatory burdens but tries as far as possible to avoid imposing new burdens and frees up businesses to create wealth rather than to administer a bureaucratically defined regime.

We have already heard a little about the Government's record. Some 3,800 new regulations were introduced in 2000.

Brian Cotter rose—

Mr. Hammond : I shall make some progress, if I may. The Government imposed £26 billion of additional

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business taxes and £15 billion of regulatory burdens during their first term in office, so it is perhaps unsurprising that Britain has been sliding down the international competitiveness league table.

The burdens that have been imposed fall into three broad categories. Some arose from the signing in 1997 of the social chapter. At the time, the Prime Minister promised us that that would not open the floodgates to a raft of European Union social legislation and that Britain would be able to shape the legislation flowing from Brussels. However, 24 sets of new or amended employment regulations were introduced in the previous Parliament, and the Government have clearly failed to stem the tide. We have seen the working time directive, the parental leave directive, new maternity and paternity leave arrangements, the part-time workers directive, the prospective temporary agency workers directive and, most recently, the notorious information and consultation directive, in respect of which the Government cannot even persuade their own MEPs to vote for the position that they are pushing in the Council of Ministers.

I want to deal with the charge, which rather stung me, that was made by one of the Minister's colleagues during Trade and Industry questions last week—that is, that what we call burdens on business are in fact legitimate moves by the Government to protect the rights of employees. Having tried to analyse that argument, it seems to me that anything that protects the rights of employees by adding to the non-wage costs of employment must come from the pot of resources that is available to pay those employees. As a result, by regulating, and thereby increasing the non-wage cost burden on business, the Government are, in effect, dividing up the pot between non-wage benefits—which are enjoyed in the form of greater employment protection, greater rights to maternity leave, and so on—and money wages. They are thereby redistributing the product of labour between different individuals. For example, non-parents will earn less than they might otherwise earn, owing to the imposition of non-wage costs on business to support parents. That is a subject for a serious debate. Simply to say that burdens on business are the flip side of employee rights is not the whole story—it must be thought about a little harder.

European legislation, apart from the social chapter, imposes a raft of further burdens on British businesses. Our European colleagues would no doubt see that as levelling the playing field, but our productivity gains do not allow us to absorb such burdens.

The third leg of the stool comprises home-grown burdens such as the Employment Relations Act 1999, student loans, the working families tax credit, the Child Support Agency, stakeholder pensions and other measures to which hon. Members have referred.

Mr. Love : Will the hon. Gentleman give way?

Mr. Hammond : I will not, because I want to give the Minister plenty of time to respond.

I want to make a few suggestions to the Minister. He should put the interests of British business first and recognise that they are also the interests of British employees. He should not give away our relative advantage—the flexibility enjoyed by our small firms

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and microbusiness sector. If we make our economy look more like the European economies, but without achieving a huge rise in labour productivity, we will all suffer. I ask him to implement with less zeal the stream of legislation from Brussels, recognise the special burdens that those regulations impose on small business, use all possible small firms derogations and ask for more from the Council of Ministers. I ask him to control the Labour MEPs, at least, in Brussels to ensure that they support the Government in those efforts.

The Minister should introduce independent cost-impact assessments of all new regulations and go for better regulation, not more. He should introduce sunsetting and, above all, slow down. He should put the brake on the torrent of legislation and regulation that has flowed in the past four years. I ask him to give business an opportunity to digest such measures and give the Government a chance properly to measure their impact on the economy, so that we may move forward at a pace that everyone is capable of sustaining.

10.45 am

The Parliamentary Under-Secretary of State for Trade and Industry (Nigel Griffiths) : I am pleased to represent the Government today on this important issue. I congratulate the hon. Member for Hertford and Stortford (Mr. Prisk) on securing the debate and I thank other hon. Members for their thoughtful contributions.

Reducing the regulatory burden is a key component in achieving our vision of making the United Kingdom the best place in the world to set up and run a business. That is why, for the fifth consecutive year, the number of small and medium-sized enterprises has grown, with the new SMEs outstripping those that are winding up. I know the value of the SME sector, and the present Government have taken, and will continue to take, key actions to minimise unnecessary burdens on business and to ensure that we achieve our vision.

I want to illustrate those practical examples of action later, but first I shall briefly paint the debate on to a broader canvas that takes in the totality of regulation, rather than just the narrow vision of burdens. Regulations and other Government formalities are introduced for many different and worthwhile reasons: for example, to provide consumer protection, to protect employees from unfair employment practices, to ensure safe work practices and to protect the environment. Last year, 180,000 people were injured and 160 killed in the workplace, and more than 30,000 consumers were harmed by faulty products. In light of those figures, it is easy to see why Governments have to regulate. Regulations are also introduced that create real benefits for business, setting pro-competition frameworks, ensuring that small businesses are paid on time and giving consumers confidence in certain markets through consumer protection legislation.

We all know that regulations can impose costs on business. We must take care to ensure that those costs are not disproportionate and do not impede innovation, competitiveness and growth. The present Government are well aware of that, and have taken a number of strong actions to ensure that burdens are minimised.

Mr. Love : Does my hon. Friend agree that Conservative Members are trying to rewrite history?

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Was it not the former right hon. Member for Henley, now Lord Heseltine, who imposed record increases in regulatory burdens when the Conservatives were in office?

Nigel Griffiths : I was keen to avoid party politicking, but my hon. Friend makes a very good point. From 1994 to 1996, the then Government introduced more than 10,000 regulations. The hon. Member for Tiverton and Honiton (Mrs. Browning), who was a Minister in the previous Conservative Government, said in a Queen's Speech debate:

The hon. Member for Hertford and Stortford quoted Mr. Rupert Murdoch, but I can bring him a little closer to home. The right hon. Member for Kensington and Chelsea (Mr. Portillo), the former shadow Chancellor, noted on 5 July that

That is a telling and welcome admission.

Mr. Hammond : Will the Minister give way?

Nigel Griffiths : No. I want to make progress and answer some of the many points that have been raised.

We have taken action to improve the preparation of future regulations, to address the problems that former Conservative Ministers recognised—as do we. We also want to make it easier to deal with the stock of existing regulations, such as the 10,000 that I mentioned a moment ago. Such action demonstrates that we are working right across the spectrum of regulation to ensure that regulations are well designed and easy for businesses to comply with.

We have put in place strong guidance on preparing regulatory impact assessments for new regulations, and published guidance on how those should be carried out. We have established the ministerial panel for regulatory accountability, a strong body which has the power to simplify existing regulations and ease regulatory pressure on business. It does that by providing a strategic overview of the Government's regulatory plans and by calling Ministers to account over regulatory proposals.

Last April, we established the Small Business Service, a key aim of which is to ensure that the concerns of small businesses are properly considered in the regulatory process, and that Departments think small first when designing regulations. We have also ensured that regulations currently in preparation are prepared under appropriate processes. Last November, we introduced a new code of practice to ensure better consultation. From the beginning of this year, consultation periods have, in most cases, been at least 12 weeks. We now require Departments to issue guidance on legislation at least 12 weeks before it comes into force. The SBS has recently issued guidance on that, helping other Departments to draft their guidance in a way that businesses can clearly and easily understand, to help them to comply with policy.

The Regulatory Reform Act 2001 will help to reform outdated and over-burdensome regulation. I have asked business organisations to suggest areas where that Act

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can be used. However, we are not working just on the design of regulation. We are also ensuring that clear and timely guidance is available to businesses to enable them to comply easily with regulation. We are working hard on practical examples that will make it easier and less costly for business to comply with Government regulations.

Mr. Richard Page (South-West Hertfordshire): I have come especially to listen to what the Minister has to say, but we have heard all this before. May I remind him that, two years ago, the previous Secretary of State, the right hon. Member for Tyneside, North (Mr. Byers), gave a

The Minister has spoken glowingly about the Cabinet Office Committee. In March, the then Minister for the Cabinet Office and Chancellor of the Duchy of Lancaster said:

However, for the past two years we have seen record introduction of regulation—an example of saying one thing and doing another. How can we be sure that what the Minister is now telling us about will work?

Nigel Griffiths : The hon. Member for South-West Hertfordshire (Mr. Page) obviously missed the point that I made at the beginning. We are now in the fifth consecutive year when the net number of SMEs has grown. That is partly because we have been putting in place a better, more favourable regulatory framework. We recognise that there are problems—otherwise, we would not be having today's debate. I am pleased that Patrick Carter's review of payroll administration, which several hon. Members have mentioned, will result in real benefits for business in the areas that have been discussed today.

The time saver initiative will save time for business by making it easier and faster for business to comply with Government administration. The enforcement concordat is ensuring that local government enforcement officers are working with good businesses, not against them. I recently delivered a speech at the local business partnerships conference, which was held to encourage and promote the network and provide a discussion forum for issues affecting businesses. The conference was another example of how the Government are taking practical steps to help business by bringing together leading enforcement officers, beacon councils and businesses that are affected and can best inform us.

Mr. Hammond : Will the Minister give way?

Nigel Griffiths : No; I will make some progress and cover other points that were raised.

Last week, I held a conference with leading representatives of small businesses to discuss the strategy of the Small Business Service regulatory team. That strategy was strongly endorsed, and the meeting proposed several actions that the Government could

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take to help business. We will hold a similar event in the new year to assess progress. We are not resting on our laurels, but continually searching for ways to make life better for business.

Mr. Prisk : Will the Minister give way?

Nigel Griffiths : No.

We have taken concrete action on many other matters, by working with businesses to limit the burdens on them. At the same time, we have responded to the needs of small businesses to provide a better regulatory format. For example, small businesses asked for more regulation on late payment of debt, and that regulation was included in the total, and yet we were castigated for the number of regulations. The ability of small businesses to charge interest on debt has brought about considerable reductions in the average time that it takes larger firms, in particular, to settle with smaller ones.

Mr. Prisk : Will the Minister give way?

Nigel Griffiths : No.

It is vital that all Governments make life easier for business and take practical action to achieve that result. We recognise that the health of small businesses is important for our economy and that small businesses contribute £1 trillion in output to our economy and employ about 12 million people, which is a considerable proportion of our work force. While the motivators and drivers of the last century were undoubtedly the big corporations, in this century the drivers for progress, innovation, employment and keeping the UK ahead in international competition will be small businesses.

We have taken practical steps to ensure that regulation, when required, is well designed and minimises the burden on business, while still achieving the policy intent. We have taken practical steps to ensure that good guidance is available and that it is easier for business to comply with regulations. We will continue to minimise the burdens on business and ensure that we achieve our vision of making the UK the best place in the world to start and grow a business.

Mr. Hammond : The Minister told us that the number of small and medium enterprises had grown over each of the past five years. That is simply a reflection of the economic cycle. Does the Minister expect the number of small and medium enterprises to grow over the next two years?

Nigel Griffiths : The hon. Gentleman reminds me of economic cycles. We have not brought the country out of the boom-and-bust cycle of the past several Governments to let the benefits fritter away.

The hon. Gentleman asked me to make a prediction that I will not make in the light of circumstances after 11 September. No sensible Minister of any Government in the world would make predictions about the future of business based on the events of 11 September and compare them with predictions on 10 September. It is clear that our economy is in a much better position to weather the downturn than almost any other economy in the world. That has come about not by chance, but by the practical measures that have been taken since 1997

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to give us a stable economic framework. That framework helped small businesses thrive in the past four years, and helped the Government get to grips with regulation, which, as the quotations that I made from the words of previous Conservative Ministers show, was in danger of running out of control. Our policy strategy is focused on those attempts to get to grips with those regulations. Only about 4 per cent. of the plethora of regulations impinge on small businesses in terms of costs.

Mr. Frank Cook (in the Chair): Order. We come to the next topic for our consideration.

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