Sam Bowman: The Government has so far failed to make the cuts to business regulations necessary for Britain to succeed. Here's how it can.

Sam Bowman is Policy Director at the Adam Smith Institute. Follow Sam on Twitter.

The Government has made laudable efforts to cut spending and reform the education and welfare systems, but so far it has failed to cut the business regulation needed to revitalise the private sector. Employment is growing, but slowly. Small and medium-sized enterprises (SMEs), which make up 99% of all businesses and account for 59% of employment, are struggling under costs imposed by regulation and tax.

Today the Adam Smith Institute publishes a policy paper, Unburdening Enterprise, which identifies nine steps the Government should take to reduce costs for businesses, particularly the cost of hiring new workers. We hope that these steps, implemented as urgently as possible, will revitalise the private sector and restore business confidence.

60% of SMEs surveyed last year by the British Chambers of Commerce (BCC) said that they would like to take on more employees, but cannot afford to do so. A 2010 survey by the Federation of Small Businesses (FSB) of its members found that 44% of small businesses would take on more employees if the Government cut employers’ National Insurance contributions.

Employers’ National Insurance contributions add an additional 13.8% to the cost of employment for businesses. We propose that the Government scraps the employers’ share of National Insurance contribitions for all businesses with fewer than fifty employees. This would save a business employing ten people at the average national wage of £25,896 per annum an amount equal to the cost of hiring an extra employee. Excluding sole proprietorships, surveys by the BCC and the FSB suggest that this would mean the creation of at least 500,000 jobs.

Besides employers’ National Insurance contributions, SMEs say that regulatory standards impose the highest costs on them. The deadweight loss of the cost of compliance with EU and domestic employment regulation is enormous, and the Government’s efforts to cut red tape have excluded many areas, particularly EU regulations. The Government should commit to exclude SMEs from any new regulations over the next three years, including national minimum wage increases, pension reforms and the equality bill, and should fight to exempt small businesses from new EU regulation altogether.

One intriguing way of side-stepping much SME regulation might be to encourage and facilitate SMEs to register their employees as being self-employed under contract. This would allow them to avoid many of the stifling employment regulations that are disproportionately costly to SMEs and increase labour market flexibility, without affecting employees of large businesses. The advantage of this approach is that it would avoid politically awkward battles to scale back employment legislation.

As well as these proposals, we argue that employment tribunals should be curbed, that the Government should establish a tight deadline by which its own contracts are paid, reverse this year’s 5.6% hike in business rates, and introduce provisions for a ‘youth contract’ exempt from minimum wage, and other employment entitlements should be introduced to encourage SMEs to take on young employees. The report is available to read in full here.

The Government has inherited a bloated, unwieldy system of business taxation and regulation from Labour. Regulations designed to “cut big business down to size” have in practice crippled small and medium-sized businesses, and are holding back employment and growth. The real stimulus that businesses need isn’t another injection of spending and debt – it’s for the state to get out of the way.