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What the budget means for SMEs - SBP

Chris Darroll says while broad policy direction of budget is commendable, it falls short on some critical points

What the Budget means for SMEs

In the 2014 Budget, Minister Pravin Gordhan trod a prudent course between the demands of an election-year constituency and South Africa's fiscal stability. Reiterating that the National Development Plan is the keystone of South Africa's future, he also pressed the message that the country desperately needs improved economic growth.

The NDP envisages growth, particularly employment growth, powered by "small and expanding firms". South Africa's prospects are not linked merely to small and medium enterprises, but to SMEs able to grow successfully. So does the budget encourage their success?

The budget recognises the importance of SMEs to South Africa. It allocates billions to dedicated SME support, and more to stimulate selected sectors. It also notes criticism of the compliance burden across the economy. Tax matters receive particular attention. The turnover tax is to be simplified, and SARS will take "further steps to lower the cost of tax compliance in South Africa".

This is good news. SBP's annual SME Growth Index, a longitudinal survey of a panel of 500 established SMEs, has found red tape to be a severe impediment to SME growth. Compliance demands and inefficiencies within SARS are a prime problem. In the 2013 round (the results of which have just been published in a report entitled Growth and Competitiveness) we found that an average SME was committing some 75 hours of staff time every month to red tape.

Perhaps most importantly, the budget - and Minister Gordhan's speech - stresses the need for national competitiveness. South Africa cannot avoid being measured against its peers; it must recognise both its national deficiencies and national advantages. The priorities accorded improved educational quality, innovation and expansion into foreign - particularly African - markets are encouraging for the SME community.

SBP's research shows that a lack of workforce skills is probably the greatest strategic issue SMEs face. At the same time, majorities of SMEs are engaged in innovation of products or processes, and a large proportion trade in foreign markets.

While the broad policy direction of the budget is commendable, it falls short on some critical points.

The most important shortcoming is its approach to SMEs. It is targeting the smallest and youngest of this community: a firm with a turnover of R1m is essentially a "micro enterprise". A case can be made for supporting them, but they are generally not reliable creators of either wealth or jobs. On the contrary, the SME Growth Index shows that older, more sophisticated firms have a greater ability to create and to sustain jobs.   

Bolder moves are needed in future. For instance, rather than setting the turnover tax threshold at R1m, it makes sense to expand it to R5m or more. This would extend its advantages to a very different type of firm: growth-focussed small businesses, seeking more than survival.

Other tax reforms are needed, too. SMEs are frustrated both by inefficiencies in the tax system, and by some of its core aspects. For example, levying VAT on invoices rather than on receipts produces cashflow difficulties. These need to be addressed.

For SMEs to thrive in South Africa, a great deal more must be done to foster a better regulatory environment. This is highlighted by the fact that among the SMEs we surveyed, only 41% were confident that they knew all the regulations they were subject to. A full 37% said they did not know, and 22% replied "maybe".

The support and incentives announced may also prove disappointing. Much of these remain directed at start-ups. The SME Growth Index has found that while many SMEs would be interested in incentive schemes, few are participating. This is typically due to a lack of awareness of available support, or a frustration at the red tape involved. If these schemes are to have the payoffs that government hopes, they must offer more than money. Clear targeting at beneficiaries, good publicity and simplified administration are imperative.

For SMEs, the 2014 budget is more a departure than a destination. It recognises the role that SMEs play, but it is offering partial solutions; they are unlikely to start SMEs' growth engines roaring. The budget does, however, point the direction for future policy debate - which will ultimately show that bold action cannot be deferred indefinitely.

Statement issued by Chris Darroll, Chief Executive, SBP, February 27 2014

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