25 June 2021

A revamped New Enterprise Allowance would do wonders for business creation

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It is not often you find a Thatcherite policy that is just as likely to be celebrated in The Guardian or the RSA, as it is by The Daily Telegraph. The Enterprise Allowance Scheme (EAS) was a rare exception.

The idea is simple: pay the unemployed to start a business. The results were impressive. Success stories included Alan McGee’s Creation Records and Julian Dunkerton’s SuperDry clothing brand. It also helped launch the careers of Young British Artists (YBAs) such as Jeremy Deller and Tracey Emin.

It was also excellent value for money. One analysis by the World Bank estimated that it cost under £5,000 (adjusted for inflation) per job created. This is about as good as it gets for labour market policy. By contrast, some recent schemes have cost as much as 40 times more per job created. 

Yet its successor scheme, the New Enterprise Allowance (NEA), falls short in a number of key ways. At its peak, more than 100,000 were enrolled on the Enterprise Allowance Scheme at one time. By contrast, there have only been slightly more starts on the NEA over the past decade.

What explains the relative failure? A key problem is the level of support on offer. The EAS offered recipients £40 a week in the 80s, which is slightly more than what they could get from Job Seekers Allowance (JSA). The NEA is a fair bit stingier: you can claim up to £1,274 over six months, roughly 25% less than what you would have got on JSA.

The support does not last for long either. At the end of six months, you are effectively on your own. This wasn’t the case for the original EAS, where support lasted for a year.

There’s a further complication too. Under Universal Credit, benefits are gradually tapered away, which can create further uncertainty for the self-employed as to what they will have at the end of the month.

A scheme closer to the original EAS could have a powerful impact in the parts of the UK where poverty and deprivation are most stubborn to shift. We recently worked with Sage and Portland to poll over a thousand SMEs and people open to the idea of starting a business in some of the most deprived parts of London and Newcastle.

The polling revealed that starting a business is seen as a route to a better life for many people who are currently stuck in low-paid work. Entrepreneurship isn’t just a pipe dream either. Almost half the people we spoke to had clear business ideas. However, these ideas were not translating into new business creation because of two key barriers: finance and confidence.

Sometimes the problems were a matter of perception. The people we polled thought starting a business would cost £12,000. By contrast, the SME owners we spoke reckoned it only cost them £5,000. Most people would still fall short, but the gap isn’t insurmountable.

To make up the shortfall, external finance will be necessary. But the idea of taking out a loan, especially in a year where most have seen their income fall and businesses close, seems daunting to most.

In theory, the NEA should be perfect for them, but it is unlikely that just over £1,000 over six months is sufficient. If we were to expand the NEA to £100 a week over 12 months, as Policy Exchange have advocated, it would enable every recipient to find that £5,000 to cover startup costs.

There is one aspect of the NEA that is worth keeping. Under the current system support is frontloaded. After all, you are most likely to need support in your first few weeks before you’ve made that crucial first sale.

An expanded NEA should keep that aspect but increase flexibility. On the approval of a business mentor, you should be able to access up to 50% of your last six months worth of entitlement upfront.

We should also look at expanding eligibility. The scheme is only available to people receiving benefits. As a result, we might be missing out on supporting people who have developed side-hustles while on furlough. Similarly, those under 23 earning less than the National Living Wage could also benefit from support to start a business. Indeed, many of the Enterprise Allowance Scheme’s biggest successes were people who joined the scheme in their early twenties.

It wouldn’t be a silver bullet – we still need better support in terms of mentoring and entrepreneurship education up and down the curriculum. But it could help us take advantage of the massive opportunity to support the creation of new businesses in the parts of the UK where they are most needed.

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Sam Dumitriu is Research Director at The Entrepreneurs Network.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.