The BUDGET and Business Free markets vs. state intervention on investment – heads or tails?

The Budget contained several business-friendly measures including the cut to business rates, the increase to the investment allowance, more tax relief for entrepreneurs, more Government contracts for SMEs, and some more pressure for RBS and Lloyds over business lending (plus a legal body to help small firms seek redress from banks).

However, the Chancellor neglected to mention that the NI and fuel duty hikes will not be reversed, while the minimum wage will rise by 2.2% in October, which are all immediate cash flow costs for small businesses which are finding borrowing more difficult.

Perhaps the most interesting theme to come out of the speech was the Government’s renewed enthusiasm for state intervention – apparently bolstered by the ‘success’ of its measures to stave off economic meltdown in the last 18 months, and more recently, by Nissan’s decision to build the Leaf in Sunderland (for which the Government seems to be claiming sole credit).

The doubling of capital allowances will inevitably be of more use to manufacturers, who need to buy machinery, than service firms. The £2bn green investment bank will give a leg-up to low-carbon technologies. And with its £500m Growth Capital Fund, civil servants will be trying to pick winners among companies with a turnover of up to £25m.

However, this has never been a Government strong suit. According to a critical recent paper by the House of Commons Public Accounts Committee, the Government’s regional venture capital funds have lost 93% of their value since they were set up in 2000: £74m of taxpayer cash has dwindled to £5m. That’s an annual return of -16%.

The Tories argue this money would be better spent giving every business a tax break, so the market can decide where the investment should flow, but recent events have rather undermined the case for an unfettered free market as well.