British Business Returns Have Halved Since 1997 as Budget Nears

The net rate of return for private UK businesses has fallen from close to 19% in 1997 to around 10% today. That figure, more than any speech, frames the problem Chancellor John Healey faces when he delivers his first Budget next week.

Healey has been making a bold pitch. In an interview with the Times last week, he said he wanted to back the "bloody-minded entrepreneurs" who challenge the status quo and drive innovation. He also went out of his way to insist that profit is a good thing, arguing that Labour must ensure businesses make enough money to reinvest and grow.

The timing is awkward. Days before the Budget announcement, the Treasury's entrepreneurship adviser resigned, warning that entrepreneurship was being treated as a "sideshow".

What does the data say about British entrepreneurship?

Britain does not lack founders. The Global Entrepreneurship Monitor, which tracks entrepreneurial activity worldwide, ranks the UK third in the developed world for the proportion of adults starting or running a business. More than one in five Britons are doing so. That puts the UK ahead of the United States, France and Germany.

The problem is reward, not appetite. Profits as a share of the overall economy have fallen in recent years to the lowest level since before the financial crash.

The business community has also been battered by measures such as higher taxes on dividends and inheritance tax changes. The government faces an uphill battle to rebuild trust with wealth creators.

Is tax really the culprit?

Contrary to popular myth, the main driver of the profit squeeze is not that businesses are "overtaxed". Rachel Reeves' decision to raise employer national insurance contributions attracted a huge outcry from businesses. Yet the UK remains a lower tax jurisdiction for companies than its peers.

OECD data shows only 9% of total UK tax receipts come from taxes on corporate profits or gains, against an OECD average of 12%. The same research shows social security contributions are generally lower than those of comparable countries.

Why are energy costs the real pressure?

Rising energy costs are the primary pressure now. British businesses face the highest industrial electricity prices in the developed world. Every business uses energy in some form, and unless costs come down, it will be hard for UK plc to generate decent returns.

One proposal circulating in Whitehall would reform the Emissions Trading Scheme and use the proceeds to expand the British Industrial Competitiveness Scheme, which cuts energy bills by 25% for eligible firms. The proposal would stop renewable energy companies receiving higher prices when gas sets electricity prices, and pass the savings on to businesses. Approving the Jackdaw gas drilling project alone will not be enough.

How big is the inflation problem?

Inflation compounds the squeeze. Since 2008, UK prices have risen faster than those in Europe or the US. £100 of goods in 2008 would cost £171 in Britain today, compared with €145 for €100 of goods in Europe. This drives up wages and business costs, leaving workers and employers worse off.

Cheaper energy would help tame inflation. So would producing more essential goods and raw materials at home rather than relying on imports. Reindustrialization, on this argument, is good for business and good for Britain.

What should the Chancellor actually do?

Entrepreneurs want a plan to cut the cost of doing business, not empty platitudes. That means hard choices, including shifting resources away from populist cost of living subsidies for households and towards cutting business bills, rather than simply shifting the energy burden onto taxpayers.

If he faces resistance, the Chancellor should show the same bloody-minded determination that entrepreneurs bring to their own ventures. The test next week is whether the Budget matches the rhetoric.

By Daniel Okafor