It is political orthodoxy that small business is the engine room and the backbone of the Australian economy. News releases of politicians of all persuasions, as well as the official records of Parliament are littered with statements eulogising small business in the nation’s shared prosperity.
“It is widely asserted – and believed – across the Australian political spectrum that small business is the ‘engine room’ or ‘backbone’ of the economy,” Saul Eslake – former chief economist for ANZ and Bank of America and now master of his fate at Corinna Economic Advisory – wrote in. “What is extraordinary about this ‘engine room’ doctrine is it is upheld by so many, with such devotion, despite the complete absence of any evidence for it.
So, how does one of Australia’s leading economists come to this conclusion? The first issue is employment. Small businesses employ almost 4.7 million people, and it is often said they are the largest employer in the economy. But “what is far less often pointed out,” Eslake says, “is that this number – 4.67 million – is smaller ... than it has been in all but four of the past 13 years.”In 2007, small businesses accounted for 47.8 per cent of total employment; by June 2020, they accounted for 37.
Although business investment across the economy has been on the decline for a long time, he says the fall is more prominent in small businesses. This is despite Productivity Commission data showing “a near-trebling in the value of financial assistance to small businesses from the Commonwealth”. Here too, though, small business has underperformed larger companies, with gross value added per person employed in small business almost $24,000 or 21 per cent below the average for all businesses in 2019-20.
The sort of people who own small businesses are often square pegs in round holes in regular employment and generally aren’t “profit maximisers”. Remember the old small business bookkeeping entry “Debit Till, Credit Hip Pocket”