Sunday 23 October 2016

Tax reforms should be just the first step towards an enterprise culture

Published 10/09/2015 | 02:30

When I presented 'Dragons' Den' on RTE Television, people often asked me whether many of the participants in the programme went on to make a lot of money.

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Some did, but probably not as many as in the BBC version. There are two simple reasons for this - population and population. With a smaller population we have fewer people in Ireland wanting and capable of being very good entrepreneurs.

But also, if you start up a basic consumer business, such as pizza delivery, a new sauce or a website for the Irish market, you automatically have fewer potential customers.

This means you have to work harder, be smarter and possibly rack up losses for longer than your equivalent in a bigger and more urbanised marketplace.

With that in mind Enterprise Minister Richard Bruton remarked recently that we have great entrepreneurs in this country but just not enough of them. And of course he is right.

Perhaps more worryingly, Ireland slipped in the ranking of early-stage entrepreneurial activity last year, as compiled by the Global Entrepreneurship Monitor.

The slippage was quite pronounced as we slid from second in the EU-15 to eight. Approximately 20,400 people started a new business here in 2014, which placed us 16th out of a group of 25 countries. It was down from 32,000 in 2013.

For some reason, 2013 seems to have been a "banner year" and we have now drifted back to a similar level of activity as in 2010, 2011 and 2012.

But there is a big problem.

Ours is the fastest growing economy in the EU. Back in 2010, we were putting tens of billions into the banks and in 2011, we entered an IMF bailout programme. We should be seeing an upward trajectory. One figure to rise in 2014 was the number of people who perceived good opportunities to start in business.

One in three adults said they could see good opportunities but it was still a lot lower than the 46pc in the survey in 2007 when we had all gone money mad - but not business mad. More perceived an opportunity but fewer acted on it in 2014 than in 2013.

The GEM report provides an interesting picture portrait of our typical early stage entrepreneurs. Of the 20,400 who started last year, two-thirds are the sole owner and two-thirds don't yet have any employees. Three-quarters of them expect to have employees within the next five years, and the report shows that 25pc of them don't.

Millennials, those aged between 18 and 34, are more likely to perceive opportunities for business and have a higher aspiration to start a business compared to older groups.

But they are not more active as new business owners. They account for 39pc of new business owners while those aged between 18 and 24 account for just 6pc.

At 6.5pc of the adult population, our early stage entrepreneur numbers are well behind countries like the UK (10.7pc), the Netherlands (9.5pc), Austria (8.7pc), the US (13.8pc), Canada (13pc) or Australia (13.1pc).

The smaller population argument could be a factor here where it can be more difficult to make a long-term success of a business in Ireland if it only serves the domestic market.

And our numbers are ahead of relatively small population countries like Denmark (5.5pc) or Finland (5.6pc). Clearly we are getting some things right but this is a slow process.

A worrying number of our startup entrepreneurs do it out of necessity (30pc). Necessity may the mother of invention but for many it is not the best basis on which to begin a business. It could mean people are ill-prepared, under invested and just a little desperate. Compare our 30pc with 12pc in Austria and just 6pc in Denmark.

Attitudes towards business in Ireland have changed dramatically since the 1980s. Cynicism and scepticism dominated the attitude to business in the dark recession days of the 1980s. As the economy improved in the 1990s, so too did the perception of business and of running your own business as an honest, respectable admirable thing to do.

This hit a hiatus in the boom and took a massive hammering in the crash. One could argue that it is coming back into some kind of healthy balance again but has taken time for the economy to recover and the perception of opportunities with it.

More people in Ireland consider the media to be supportive of entrepreneurs than in any other European country.

The GEM survey shows that many of those engaged in early stage entrepreneurship believe there are solid government and state supports. Some 80pc believe support for new and growing firms is a high priority for government.

Just over half of "experts and entrepreneurs" consulted indicated that they considered there to be an adequate number of government programmes for new and growing businesses.

Curiously, of those who felt there were an adequate number of programmes, almost one-third of them did not describe them as "effective".

I would interpret this as one in three of them saying we have enough programmes but they might not be working as well as they should.

The big obstacles referenced by people in the study are access to suitable credit, and difficulties with bureaucracy, the tax burden of the self-employed and the lack of a safety net.

Fear of failure ranks high for why people don't set up companies, but that is the case in many other countries too.

Insufficient start-up credit is a major obstacle for would-be entrepreneurs. As in other countries they rely heavily on investment from family and friends. Investment levels from these sources averaged €40,500 over the last three years. In the UK, the figure was €25,700.

It is hard to imagine that a startup in Ireland needs nearly twice as much money as one in the UK. Surely this disparity reflects the fact that Irish startups, compared to British ones, are having to rely more on family and friends than banks when setting up a business.

Recent speculation suggests that Michael Noonan will begin dismantling the tax structures that penalise self-employed over PAYE workers. The additional USC for a self-employed person earning over €100,000 will be gradually reduced to bring it into line with a PAYE person.

This is long overdue and is as much a statement about how Ireland views entrepreneurs as it is about the real difference it will make.

Many people who start a business will not earn €100,000 or anything like for several years, if ever. Equally, there are many landlords, whose rental income is a multiple of that and whose employee numbers are zero. Some of them will have jacked up rents in recent months to enhance earnings further.

Regardless of these realities the government needs to make strong signals about the value of starting a business and creating employment to the wider economy. The USC adjustments should be just the start.

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