Small business the heavy lifters of economic recovery

- October 21, 2020 4 MIN READ

If we can be certain of one thing in 2021, it is that small businesses – not big business – will be doing the heavy lifting to keep Australians in jobs, writes Trent Innes, Managing Director Xero Australia.

While the 2020 Budget is a recognition of the role Australia’s 2.3 million existing small businesses play in employing almost half of the workforce, we cannot overlook the approaching torrent of new business owners who will need support, guidance and confidence when they take the leap.

It takes heart to run a small business but it takes bravery and optimism to start a new business during the darkest days of an economic downturn.

Measures like $4.9 billion in carryback provisions will help established small business owners – excluding sole traders, partnerships and trusts – to write off pandemic loss against profits from the previous year. And the $26.7 billion Business Investment Allowance will reward small businesses for investing in income-producing large plant and equipment.

Around $17.8 billion in personal tax cuts is an important boost to Australia’s 1.4 million sole traders, the majority of all small business. Most self-employed are unincorporated, and they pay personal tax, not company tax.

The 2020 Budget is a solid foundation to support these existing businesses, but as we approach the May 2021 Budget we must take a longer view on how we support the green shoots of entrepreneurship in every industry and every community.

Economic downturns, somewhat counterintuitively, are known to trigger spikes in new business. The Great Depression, the 1990s recession, and the global financial crisis all marked the birth of great companies. Disney, Microsoft, Uber and Airbnb are among the thousands of successful businesses started during past downturns.

In the 1990s recession, owner managers comprised 20 percent of the Australian workforce. By 2019, this proportion had slipped to about 17 per cent, according to Xero’s Boss Insights 2020 report.

Now we are seeing the start of the business owner revival. Between July and August this year, the Australian Bureau of Statistics recorded a net increase of 44,500 in employment. It was somewhat of a surprise given the disastrous 2020, however a closer look revealed a 50,200 increase in the number of sole traders compared to growth of just 2,600 in payroll jobs.

Based on previous average growth of 65,000 new sole traders a year, Australia hit three-quarters of that figure in just three months.

It’s important to note two-thirds of new businesses have been started by women since 2009 so it’s fair to say women have driven a decade of Australian business growth. While female employment was hit hard this year, measures like the $240 million Women’s Economic Security Statement are critical so that we don’t lose momentum in the growth of female-led businesses.

There are many motivations for becoming your own boss during a recession; it may be necessity, access to cheaper credit or an opportunity presented by a buyers’ market for labour and goods.The number of large businesses in Australia is shrinking, and so is the number of people they employ. The recession has just accelerated this trend.

And this is just the beginning. With the broad-based JobKeeper wage subsidy ending in March to be replaced with the JobMaker Hiring Credit targeted at the unemployed under 35, it’s fair to assume we’ll see a tranche of experienced, mid-career Australians reconsidering their job options.

Our Boss Insights 2020 report shows that 45 is historically the peak age for entrepreneurship. For now, it means it’s Gen-Xers’ time to shine, but we also need to prepare the next generation – the Millennials – for their turn as the drivers of entrepreneurship and local job growth in the next decade.

With the Budget’s lacklustre population growth forecast, supporting these small businesses with the right policy settings – like prompt payment times, access to credit, and e-invoicing – is key to returning to our pre-pandemic levels of jobs growth.

In February, our Boss Insights 2020 report estimated the economy would need to create at least five million new jobs over the next 10 years to maintain average jobs growth. If our 2.3 million small business owners can employ just one extra person, we’re halfway there.

Even today, this is not such a fanciful notion as it might seem. Take for example, The Sheet Society.

Founded by Melbourne couple Hayley and Andy Worley in 2017, the online bed linen business has boomed during COVID-19. In the space of two years, the business has grown from two people in a shared working space to a team of almost 30 and two warehouse expansions.

It’s the multiplier effect of small businesses like these, the sole traders and microbusinesses operating today from kitchen tables or shared offices, that hold the key to our economic recovery.

The pandemic has brought forth more existential employment trends. For many, 2020 marks the end of the business suit, or the daily office commute. The rapid move to remote working and digitisation has compressed 10 years of disruption into just one year.

This lightning bolt revelation – you can choose when, where and how you spend your working hours – will drive many to self-employment. As the largest and fastest-growing business segment in Australia doing the heavy lifting for our economy, they need our nurturing and support.

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