Every day, I step out of my restaurant on London’s South Bank and see the towering offices of global corporations.
Their imposing presence is hard to ignore, overshadowing and making it easy for local businesses like mine to fade into the background. But the reality is, it’s these small businesses that keep this country’s heart beating.
In a recent op-ed for the FT, Tim Leunig described these small businesses as its 'soft underbelly of Britain’, citing their lower R&D and productivity. He argues that larger firms would serve economic growth better, suggesting cuts to small business tax breaks and reducing the VAT threshold.
But this view is shortsighted. Small businesses are not a vulnerability; they are the backbone of our economy. SMEs make up 99% of all UK businesses, employing 61% of total employees and produced a combined turnover of £2.4 trillion in 2023. As the new Labour government seeks to boost economic growth, it’s small businesses that can drive our prosperity, not hold it back.
The real issue facing SMEs isn't their productivity but the chronic underinvestment and systemic challenges that have held them back for years. These interconnected problems—lack of access to finance for innovation, a shortage of skilled workers, and regional disparities have led to lower growth and innovation. Tax breaks alone are insufficient if SMEs don’t have the talent, capital or wider infastructure to take advantage of them.
If we can tackle these challenges, the potential for the UK economy is significant. The Generation Growth report by Goldman Sachs highlights that only 3% of the UK’s 1.2 million established SMEs are ‘productivity heroes’—businesses that are increasing their turnover at a faster rate than their headcount while also expanding their workforce. According to the report, even a modest increase in this rate—from 3% to 4.8%—could generate an additional £106 billion for the UK economy.
This potential isn’t just about broad economic growth. SMEs are also key to driving innovation in sectors where the UK has a global competitive edge, such as technology, creative industries, and renewable energy. Yet, despite this creative and innovative potential, many SMEs find their growth constrained by limited access to finance. According to the British Chambers of Commerce, nearly half of these businesses struggle to secure funding.
These financial barriers are compounded by regional disparities in productivity for SME’s.
IPPR's analysis of ONS data in 2019 highlighted that SMEs in the North have considerably lower productivity levels compared to those in the South. This regional imbalance is not a reflection of the capabilities of those SMEs, but rather the result of a systematic lack of investment in critical infrastructure, such as transport —investments crucial for enabling SMEs to compete and thrive across the UK. Without addressing these regional inequalities, the full potential of SMEs across the UK will remain untapped, limiting the broader economic growth that could be achieved.
The UK’s education system presents another challenge, as it has not adequately prepared employees with the skills that SMEs require. The Generation Growth report by Goldman Sachs reveals 55% of their surveyed businesses report difficulty accessing the talent they need- some of whom are on the verge of becoming ‘productivity heroes’. Without targeted vocational training, more apprenticeships, and increased collaboration between our world class educational institutions and businesses, SMEs like these will struggle to expand and drive the economy forward.
Small businesses are not Britain’s weakness—they are its backbone. Systemic challenges like underinvestment in education, infrastructure, and innovation have held them back. Instead of cutting support, we must invest in solutions that enable SMEs to thrive: better access to finance, targeted training, and wider infrastructure development. The future of Britain’s economy depends on empowering these businesses to unlock their full potential.