‘Widening chasm’ between small and large businesses

A new report reveals the contrast in business conditions between small and large businesses worsened in the December quarter, prompting a call for further action on tax reform.

The Australian Chamber of Commerce and Industry’s February 2011 ACCI Small Business Survey found the index for business conditions in the December quarter fell from 44.5 to 42.

A figure below 50 indicates that economic conditions among small businesses are contracting.

Business expectations were slightly higher than business conditions but still fell short of 50, with an index reading of 47.4.

The survey suggests Australia’s two-speed economy is not limited to the mining sector, with the ACCI’s Greg Evans warning of a “widening chasm” between large and small businesses.

The indicators for business conditions, sales revenue, employment, selling prices and investment all contracted for the small business sector despite remaining positive for large businesses.

According to the survey wage costs have become the biggest constraint on small business investment since the December quarter of 1999.

Evans says the small business sector has lost a “considerable amount” of its economic momentum and recent floods and a cyclone will continue to dampen small business confidence during the first half of 2011.

“It is of concern that continued weakness in small businesses’ sales performance and selling prices in the face of the rising cost of labour and finance has affected small business cash flow and put (a) significant squeeze on small business profitability,” Evans says.

The ACCI report reveals the reading for profitability in the December quarter fell to 38.2, which Evans says is one of the lowest levels on record.

“It shows the difficulty that small businesses have in overall retained earnings and the difficult task they will have in the period ahead in terms of gaining capital for expansion and future employment,” he says.

According to Evans the retail, hospitality and manufacturing sectors are particularly under pressure from rising interest rates and a high Australian dollar.

Evans has called for a reduction in personal income tax and capital gains tax and says there needs to be further action on reforming state-based transactions taxes.

“All these taxes add up to less confidence for business and much more pressure in terms of profitability in the small business sector,” he says.

Peter Strong, executive director of the Council of Small Business of Australia, says the figures are not surprising and reflect “20 years of neglect” on the government’s part to improve the plight of small businesses.

“I agree with the chamber that we’ve got to decrease these taxes but there needs to be more than that … we need to step back and look at our competition policy in order to create a fairer marketplace for these people,” he says.