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Dr Muriel Newman

Struggle Street: the plight of small business

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Michael has been in the hospitality industry for 30 years. He’s a good operator. The awards displayed on his wall prove it.

It was three years ago that he bought his current establishment. That was before the recession hit. In each of the last two years his turnover has dropped by about 10 percent. The prospects for the year ahead are not encouraging.

The plan was that after three years he’d be sitting pretty with an increased turnover and a better bottom line with which to pay off the debt that funded the purchase. The business was his retirement savings plan.

The reality Michael faces today is not what he had planned. He’s now working more than 60 hours a week. The business is struggling and unlikely to return a profit this year. Debt has increased. Michael worries the bank manager will pull the plug after the annual visit which is scheduled for April. He is not able to sleep properly and his health is suffering.

The recession has certainly hit the hospitality industry hard. But that’s not the full story. Wage costs have increased and although Michael has reduced staff numbers he can’t cut back anymore. Nor can he work any more hours in the day. He hasn’t had a holiday since he bought the business and he won’t get one this year either even though he needs one now more than ever.

Since Michael bought the business, the hourly wage rate has gone up, employer contributions to KiwiSaver have kicked in, and now he now has to provide his staff with an extra week’s holiday a year. These costs have hit the business hard, and the irony is that while the staff get an extra week of paid holiday, he can’t afford a holiday at all.

Michael used to hire young people on the youth wage for some of the basic jobs like dishes and cleaning. He liked giving youngsters without too many skills a start on the employment ladder. However, once the youth rate was scrapped and they had to be paid adult wages, he had to let them go. The jobs were not worth the higher wage costs, especially when young people need more supervision

Michael’s overheads are mostly made up of rent, rates, power, fuel, advertising, administration and compliance expenses. When he bought the business these costs represented 20 percent of his turnover. He’s reviewed the costs many times – more so in recent months – as he’s been searching for ways to make ends meet. But he can’t cut his overheads any more and has been struggling to contain them in the face of higher power, fuel and freight costs caused by the introduction on 1 July of the Emissions Trading Scheme. Add to this, increases in ACC, as well as the time and cost of satisfying a variety of inspections from bureaucrats protecting the public interest – at his expense!

Michael’s rental agreement contains a ratchet clause so although his turnover has fallen, the best he can hope for when the rent is reviewed this year is that it stays the same. In spite of reducing discretionary spending like advertising and deferring maintenance he can’t find any more ways to cut costs.

It’s not only central government that must bear some responsibility for the plight of small businesses like Michael’s. Local government is also responsible. Michael, of course, must pay the rates on his landlord’s property so it’s Michael who bears the costs of the rate increases – which for Super City operators will be around 4.9% this year. To make matters worse he’s had to battle with the local council over his operating hours, setting him back more than $10,000; $10,000 he didn’t have.

The bottom line is that there is nothing left on the bottom line. He’s working more hours than ever in the business but this year he’s not likely to make anything from it.

2011 has started as badly as 2010 was. If it remains that way, Michael will have to close his doors – for the first time in 30 years.

Unfortunately Michael’s story is unfolding all around New Zealand. Paul Holmes described it well in an article in the Herald in August last year when he said, “The economy is tanking. Let us push away all the pink fluff and the political talk and the fine words and face it. The economy is heading south very deeply and very sharply. It is happening now. What we all dreaded is happening. What makes it a really lonely feeling is that we all know – those of us who watch these things and have been round for awhile – that neither the politicians nor their officials have an idea in hell about what to do.”

New Zealand is a nation of small business, and the reality is that for every tragic business story there is a tragic human story. The Household Labour Force Survey shows that unemployment has jumped over the last three months from 6.4 percent to 6.8 percent with 158,000 New Zealanders now out of work. In addition, Statistics New Zealand figures show more Kiwis are trying their luck across the Tasman with the long term outflow to Australia increasing from 18,512 in 2009 to 21,856 last year.

But hidden in the statistics is another story – youth unemployment. Over the last three months the number of 15 to 19 year olds who are out of work has increased by 6,000 to 25.5 percent. Having one in four of our young people out of work is bad enough, but it’s worse when you know that government policy has made the problem worse.

Before 1994, there was no minimum wage for those under that age of 20, just as there is currently no minimum wage for those under the age of 16. However, regulations were gradually introduced until the youth rate for young people aged 16 and 17 was pegged at 80 percent of the adult rate. That is until Green MP Sue Bradford’s private member’s bill abolished youth rates in 2008. Currently that means that it is illegal to hire a young person for anything less than $12.75 an hour, or $510 a week. In other words, unless a young person has a productive value of at least $510 a week, they are a cost to the employer. The result, predictably, is that fewer youth are employed. They end up on the dole, doing nothing, receiving $160.

Economist Dr Eric Crampton from the University of Canterbury has studied the effects of public policy on youth unemployment and in his article Youth unemployment policy he explains what he found:

“Starting mid-2008, youth unemployment rates began skyrocketing relative to the adult unemployment rate. We were in the midst of a pretty serious global recession. But relative to the adult unemployment rate the youth unemployment rate jumped far more than it had in prior recessions.


“The graph above shows that relationship. If the adult unemployment rate perfectly predicted the youth unemployment rate, the blue line would be flat at zero. When it’s below zero, the youth unemployment rate is less than we might have thought given the adult rate; when it’s above, the youth unemployment rate is worse than expected. By December quarter 2009, the youth unemployment rate was more than seven percentage points higher than would have been expected given the previous relationship between adult and youth unemployment rates. That’s around 12,000 kids out of work who wouldn’t have been had the youth unemployment rate followed the same trend relative to the adult rate that it had in prior recessions. As of September quarter 2010, the excess residual of just under six percentage points suggests about 8,500 youths who would otherwise have had jobs.”

In other words the abolition of the youth wage has been responsible for youth unemployment skyrocketing. Despite this, and despite the government knowing this, National has opted to leave Sue Bradford’s socialist law in place and leave our kids on welfare.

While the National Government has definitely improved the business environment through a lower company tax rate and a 90 day grievance-free trial period, much more could be done – and should be done in these tough times. Government should give priority to fostering the growth of small business by cutting red tape (particularly reforming local councils to make them enabling instead of disabling!), reducing company tax rates further to give local businesses a stronger competitive advantage (Canada has done this by cutting company tax to 16.5 percent, to match the rates in the economic powerhouses of Hong Kong and Singapore), freeing up the employment market (reintroducing youth rates would be a good start!), and essentially leaving small business alone so they can get on and create jobs and wealth for the nation!

Unfortunately while governments have a propensity to keep passing costs onto small business – treating them as the paymaster for their social programmes – they should be taking a more principled approach. Small businesses are not a soft touch; they simply do not have an unlimited capacity to absorb endless costs imposed by central government. If the government keeps putting on yet more and m

ore pressure, they will simply drive more and more small businesses, like Michael’s, to the wall.

Labour’s plan to “Mondayise” Waitangi Day and Anzac Day is a case in point. If this goes ahead, they would no doubt expect employers to pick up the cost. If a government wants to give workers another holiday, then it is they, not employers who should pick up the tab.

What businesses want most from the government is a regulatory system that fosters wealth creation, by encouraging enterprise and initiative. But most of all, small business wants government and bureaucrats to get out of the way. If we don’t treat small business right, they won’t hire people. If we continue to treat them badly they will either shut up shop or join the increasing numbers of Kiwis heading across the Tasman to what many believe is a more benign business environment there.