July 12, 2013 - Rachel Miller

Why SMEs are key to boosting local economies

Local authorities that buy goods and services from small firms help to generate millions within their local economy – but they could do even more, according to the Federation of Small Businesses (FSB).

New research from the FSB and the Centre for Local Economic Strategies shows that 58% more of the money spent by local authorities with small firms is re-spent in the local economy compared to that spent with large businesses in the same area.

The report – Local Procurement: making the most of small businesses, one year onfinds that in the past year, small local firms generated £746 million more for the local economy compared to large local businesses – even though more than £500 million less was spent with them. It means that for every £1 spent with an SME, 63p was re-spent in the local area, compared to 40p for every £1 spent with a larger business.

The FSB is calling on local authorities to up their spend with local firms. The report does show widespread good practice within local authorities, with 86% breaking contracts into smaller chunks to help SMEs win work. However, it says if each authority spent an additional 5% of their budget locally and committed just 3% more of that to small firms, an additional £788 million could be generated for local economies.

John Allan, FSB national chairman, said: "This report shows the power and strength of small firms to create jobs and growth in the local economy if they are given the help to do so. With budgets being cut there seems to be an increasing realisation that spending more locally will benefit the local economy."

Business secretary, Vince Cable MP, said: "In central government we are already trying to level the playing field with an aspirational target that 25% of our contracts should be awarded to small and medium-sized enterprises by 2015. We are currently working on Lord Young's 'single market' recommendation to establish a simple and consistent approach for all public sector procurement contracts. This should mean more SMEs can take advantage of the £230 billion of potential business each year."

Local government minister, Brandon Lewis MP, said: "Councils have billion pound procurement budgets at their disposal and they should be supporting their local economy by cutting back procurement red tape, like Pre-Qualification Questions and unnecessary equality requirements, in order to allow small firms to bid for more contracts."