Peter Strong: Why Saul Eslake’s paper is “offensive to everyone who works in small business”

Noted economist Saul Eslake recently published a paper on the ANU Press Library site titled The costs and consequences of ‘small business fetishism’. This was highlighted in an article on The Conversation and a review in The Australian Financial Review on December 29.

The Eslake paper is one of those opinions I have seen regularly over the years that try to hide a disdain of small business behind an unemotional façade of statistics and unproven assumptions. The paper is offensive to everyone who works in small business in Australia.

From an economic point of view the paper does not consider the gains for Australia from the public good provided right across our social and economic needs. 

What’s a small business?

Let’s start with the fact the paper fails to disclose the assumptions used in the analysis. Specifically, what assumption was used to define a ‘small business’? Was it the narrow $2 million in turnover used by the ABS? Or was it the $10 million threshold used by the ATO and the Australian Small Business and Family Enterprise Ombudsman? Or was it the 15-employee threshold used under the Fair Work Act (2009)? 

Judging by the conclusions reached, Eslake has adopted the narrowest definition of a small business to advance a prejudiced position against small business that bears no resemblance to reality. His apparent demarcation between a small business and a ‘new business’ — the vast majority of which are started as small businesses that stay small — is a case in point.

But what this paper shows — and what most economists fail to grasp — is that small businesses are first and foremost run by a human being, or two, who contribute tangibly and intangibly to the society in which we all live. They are not board members remote from the local world. I, and many like me, are passionate about the needs and rights of small business people because we recognise the multiplier effect of human endeavour — a fact economic theory is unable to accommodate.

Eslake’s article effectively applies reductionist thinking to demean the very livelihoods of the 6.5 million Australians who work in small business in Australia. The article adopts a dogmatic and narrow approach to economics — that of the laissez-faire economics — and that is where it fails.

The ‘public good’ of small business

Economists postulate and, for their postulations to be worthwhile, they must be calibrated with the intangibles that typically fall outside their analysis. They like to call these ‘economic externalities’ because they can’t be readily accommodated in their modern economic models, but the rest of us know these intangibles as real life.

Eslake’s article discusses the statistics of the tax gap, for instance, but fails to acknowledge ATO statistics that suggest it is only a very small percentage of small businesses that deliberately scam the tax system. So, if the tax gap for small business is larger than it should be, logically, that means the system is too complicated for the small business community. That system is designed for big businesses with more resources.

It should be noted the quantum of revenue lost pales in comparison with the tax avoidance strategies of big multinationals — think Amazon, Apple and the others. While I agree with Eslake that the ATO is not small business unfriendly, he fails to note the ATO doesn’t design the tax system. The design of the tax system is by Treasury, which is full of laissez-faire economists who have never run a business and cannot quantify the public good benefit of small business in terms of creating vibrant healthy small economies across the country.

The report also skips over the value of volunteerism and sponsorship of community organisations. Community sport runs on support from small business owners and their employees. Small business owners comprise the bulk of sponsors and the presidents and treasurers of clubs are often self-employed business folk. Big businesses support national sports teams and charities (because of the national level exposure), but small businesses quietly support those in their communities.

Eslake’s analysis therefore fails to factor in the ‘public good’ of small business because it cannot be readily accommodated under the theoretical mathematical construct of economic theory.

The engine room

The engine room ‘myth’ is not debunked. The 2.5 million small businesses referred to employ 6.5 million Australians in total, using the ATO definition of $10 million in turnover. Under this definition, small business accounts for just over 50% of the national workforce, compared with big business (32%) and the public sector (18%) making up the rest. 

The nation’s small business folk quietly go about their daily work in the nation’s economic ‘engine room’ as opposed to high-profile big businesses that live in the ‘wheelhouse’ and have traditionally extracted major concessions from governments by fierce lobbying behind closed political doors. If the small business lobby has been successful, it is not because of the enormous resources bought to bear, but because of passion, facts and the political and economic reality.

Eslake also suggests SMEs should not be supported beyond the pandemic. Surely, he is trying to be humorous? Big businesses like Coles and Woolies made a killing during the pandemic as people were locked at home and most had to cook. While some local small businesses did well, many did not — particularly those located in the CBDs of our capital cities and those in industries like hospitality. Now that they can open, those businesses are struggling to find the workers needed to rebuild their business.

Apart from the airlines, which continue to receive support, the small businesses who support domestic and international travel have been decimated. They will continue to need support as the tourism sector recovers.

The reality is small business — indeed small-to-medium enterprises (or SMEs) — are indeed the engine room of the community and a key part of the economy, and only an argument based on skewed economic analysis would ever suggest otherwise. Indeed, any politician believing such nonsense does so at their own peril when election time rolls around.