Digby Jones: Cautious times

Business leaders have warned the government there is no room for increased public spending or higher taxes on companies in the current economic climate.

In a pre-Budget report submission to the chancellor, the Confederation of British Industry has warned Gordon Brown that any across the board increases in public spending would be difficult to reverse and run contrary to the goal of reducing the overall tax burden.

Increasing economic uncertainty means a "cautious and vigilant" Budget plan is required, says the CBI. Though it backs the government's current plans to raise public spending, it warns that there is no scope for major new spending initiatives and no room for raising business taxes, which have risen by £29 billion since 1997.

However, the CBI concedes it was wrong to initially question the "rather significant" spending increases contained in the current three year plan. "The doubts we had at the time about increasing government spending in this way, in the face of strong economy-wide growth and the possible emergence of skills shortages, are now less pertinent," says the submission.

The CBI makes a downbeat assessment of the state of the economy, saying the economic climate is "highly unpredictable" with many firms experiencing the worst trading conditions for 20 years. It calls on the chancellor to prepare a contingency package of emergency tax measures for the hardest hit sectors.

"Rather than focussing on the removal of barriers to business investment and expansion, priority would have to be given to the removal of barriers to survival...Cuts in taxes adding to current business costs should then come to the fore," says the report.

The CBI wants the government to proceed with £2 billion of targeted tax measures to encourage enterprise and improve productivity. These include extending tax credits for research and development, a new tax credit for training and incentives to invest for smaller firms.

"For the longer term, it is crucial that Mr Brown pushes ahead with productivity enhancing tax credits. But if the downturn gets much worse then many firms will be focussing on survival rather than growth. The chancellor should be ready to help by bringing down costs," said the CBI's director-general, Digby Jones.

The CBI also calls for the National Audit Office to conduct a review of the impact of recent tax changes to identify anomalies and unnecessary costs, which it says has pushed up the administrative cost of compliance to "unexpected and unacceptable levels".

"Chopping and changing taxes around does nothing to encourage business confidence and promote long-term investment," said Jones.

Over the long term business leaders want lower taxes to foster competitiveness. The pre-Budget report submission says the government should limit expenditure growth to no more than the 2.25 per cent currently assumed by the Treasury.

"The chancellor needs to be cautious and vigilant. Now is not the time to pull surprise spending plans out of the hat. Nor is it any time to increase government-imposed costs on business, either in the form of new taxes or red tape," Digby Jones said.