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£145 billion productivity boost for UK economy if SME digital investment can be unlocked

Modelling by Capital Economics, commissioned by Sage, finds that £325 billion additional revenue and £145 billion economic value – equivalent to 2.7 million jobs - could be delivered by empowering SMEs to realise their appetite for technology investment as new local lockdowns come into force.
  • 67% of small and medium-sized businesses want to invest more in technology, and further digitisation would deliver performance improvements and support recovery for nearly three-quarters
  • However, the pandemic has severely impacted the ability of SMEs to invest. Over three-quarters are unable to deliver necessary investment in technology due to financial constraints, primarily driven by Covid-19
  • Realising SMEs’ current appetite for technology investment in full could:
    • Drive up to £145 billion in economic output as a result of improved productivity
    • Deliver up to £325 billion additional SME revenue annually
    • Support up to 2.7 million jobs across the UK
  • Prompt Government intervention to encourage digital adoption could deliver up to £50 billion in revenue, £20 billion in economic output and support around 400,000 jobs

27 October 2020 – New research published today by Sage plc and Capital Economics finds that unlocking SME digital investment will be critical in helping small and medium size businesses remain resilient as a wave of local lockdowns trigger ongoing uncertainty - and could also deliver major benefits to the UK economy.

According to the research, Covid-19 has had a transformational effect on attitudes to technology among UK SMEs. 73% of businesses have turned to technology during the pandemic to keep their business functioning – although only 17% were planning investment before the crisis.

It has also highlighted the appetite, and need, for greater digitisation. 43% of businesses say the pandemic has made technology investment more urgent in order to remain competitive and boost productivity – and nearly three-quarters (72%) believe that further investment now into key areas of technology would deliver performance improvements and support recovery. This increased appetite presents an opportunity to underpin fundamental long-term productivity improvements among UK businesses.

However, Covid-19 has dramatically reduced businesses’ capacity to invest. Over three-quarters say that financial constraints are preventing the necessary investment in technology.

If these barriers can be overcome and this untapped appetite for investment unlocked in full,UK SMEs could deliver major benefits to the economy, including

  • £145 billion in annual economic output as a result of improved productivity, equivalent to:
    • 140 million working weeks per year – or 8 working weeks per employee, per year
    • More than 2 times the total estimated cost of the Job Retention Scheme
  • £325 billion additional annual revenue
  • Supporting, creating and protecting 2.7 million jobs across the UK private sector

There is widespread support among businesses for Government-backed financial incentives to accelerate technology investment, including digital vouchers, digital adoption grants and tax benefits. Almost 9 in 10 believe that these incentives would directly benefit their business performance. Capital Economics analysis reveals that these policies could deliver an incremental £50 billion in revenue annually and £20 billion in economic output from improved productivity, supporting around 400,000 jobs. The benefits of the policies modelled would outweigh the cost within a year, delivering a positive net fiscal impact.

Steve Hare, Sage CEO, said:“As businesses across the country face the threat of tighter lockdowns, the need to place firms on a more sustainable footing – by giving them confidence and support to invest – is more important than ever. The only certainty for SMEs right now is uncertainty, and we must do everything we can to ensure firms can stand effectively on their own two feet through a challenging period.

“We are on the brink of a once-in-a-generation digital revolution among SMEs – one that will power job creation and growth at a time when its most needed, as well as helping to finally crack the UK’s long-standing productivity puzzle. But the UK stands to lose out on these massive gains if we do not encourage this investment now. Currently, businesses do not believe they can deliver even half of the technology investment they need in order to position themselves for recovery and growth.

“So, in addition to targeted and local support, SMEs in all sectors across the UK need a strong message from Government that they can invest in technology with confidence. Our research shows that policy incentives like vouchers and tax breaks would pay for themselves within a year, driving a tech-led recovery that will underpin greater resilience, productivity, and job creation for decades to come.”

Felicity Burch, CBI Director of Innovation and Digital, said: “Against the Covid pandemic, UK business has demonstrated extraordinary levels of adaptability by forging new working methods and routes to market. Much of this innovation has been underpinned by an accelerated move towards new technology.

“But cash is now tight, and this will hold firms back as they now seek solutions to help them grow out of the current crisis, and on to a successful future beyond Covid.

“It is clear the Government needs to step up the support available for innovation adoption. This will be vital to ensure the UK builds back better, with a more productive, sustainable and green economy in all parts of the country.”

Other key findings from the study include:

  • On average, SMEs believe they need to invest £10,000 into technology to best position themselves for recovery and growth. Micro businesses (<10 employees) believe they need to invest £5,000 – 9,000 on average, and larger SMEs (>10 employees) are most likely to need to invest upwards of £10,000
  • On average, SMEs surveyed believe that if they were able to invest the total amount, they need to into tech today, in the next six months they would have an average +15% increase in monthly revenue and +14% increase in monthly profits
  • Communication platforms, cyber security and accountancy software are the technology tools SMEs feel deliver the highest value and are most beneficial to their performance
  • The hospitality, technology, retail, construction, and manufacturing sectors are most likely to say that Covid-19 has reduced their ability to invest. They are also the sectors who anticipate the greatest benefit from Government financial incentives to encourage technology adoption, with over half of technology and retail businesses predicting significant benefits. 
  • 49% of SMEs rate their current level of technology adoption as high (between 7/10 and 10/10)
  • SMEs that have digitised have done so primarily to stay competitive in their market (39%) or to increase their employees’ productivity (38%)

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Capital Economics developed an indicative model to assess the economic and fiscal impact of three potential policies to increase digital adoption among SMEs. This is based on a survey of 1,011 SMEs in the United Kingdom conducted by Portland in September 2020, combined with publicly available statistics and reasoned assumptions. The model was disaggregated by business size using the Office for National Statistics’ Business Population estimates to scale up results to the SME population.

The core of the modelling used survey results to quantify the difference in the amount SMEs planned to invest with and without the given policy for those who said they would take it up. This was then used to scale the results from the survey based on their expected benefits to productivity, revenue, profits and employment from increased investment.
The scaled-up value added, profit and employee impacts were used to estimate the taxes generated, including employee taxes, VAT and corporate tax. For cautious estimates, we did not include any multiplier impacts. This was compared to the cost of the policy. The cost of the policy was calculated by scaling up the amount that businesses in each size-band indicated they would use from the scheme to the associated business population in the United Kingdom (based on the expected take up of the policy), together with an assumed administration cost of fifteen per cent.

About Sage

Sage is the global market leader for technology that provides small and medium businesses with the visibility, flexibility and efficiency to manage finances, operations and people. With our partners, Sage is trusted by millions of customers worldwide to deliver the best cloud technology and support. Our years of experience mean that our colleagues and partners understand how to serve our customers and communities through the good, and more challenging times. We are here to help, with practical advice, solutions, expertise and insight.

About Capital Economics

Capital Economics is one of the leading independent economic research companies in the world. Our large team of more than 60 experienced economists provides award-winning macroeconomic, financial market and sectoral analysis, forecasts and consultancy, from offices in London, New York, Toronto, and Singapore.

Founded in 1999, we have gained an enviable reputation for original and insightful analysis and have built up a diverse and distinguished client base. The majority are in the financial sector, including some of the world’s largest investment banks and wealth managers, as well as smaller and more specialist firms. But we also have a growing number of corporate clients from a wide range of sectors and industries, and many relationships with governments and central banks, both in advanced and emerging economies.

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