Business wary of cuts in capital budgets

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Business leaders are urging George Osborne to avoid deep cuts in infrastructure projects by dropping the “unsustainable” ringfencing of health and overseas aid budgets.

The EEF manufacturers’ federation says the chancellor, who is preparing to slash spending in next week’s Budget, must not only seize the opportunity to cut the budget deficit but also lay the foundations for rebalancing the economy in favour of industrial investment rather than consumption.

In its Budget submission, it calls for value added tax to be raised from 17.5 to 20 per cent to discourage consumer spending and for investment to be boosted by modernising capital allowances to reflect the shorter life of modern machinery.

The British Chambers of Commerce urges Mr Osborne to introduce an immediate two-year freeze on public sector wages, commit to a full reversal of the planned rise in employers’ national insurance and avoid or mitigate a “damaging” rise in capital gains tax.

A rise in VAT is viewed as a near-certainty by business groups. “If tax rises are unavoidable, they should be targeted at consumption taxes rather than payroll, income or profits,” said David Frost, the BCC’s director-general.

The lobby groups fear the ringfencing of health and overseas aid increases the risk of more drastic cuts to capital investment, already scheduled to fall sharply under the previous government’s plans.

The EEF is wary of a proposed 80:20 split between spending cuts and tax increases, favoured by the Conservatives in the election campaign and supported by the CBI and Institute of Directors.

“At least 60 per cent of the job of reducing the deficit needs to come from lower spending if significant cuts to capital budgets, which are vital to long-term competitiveness, are to be avoided,” it said.

The EEF supports a three-point cut in the headline rate of corporation tax to 25 per cent within five years, but says this should not be financed by reducing capital allowances or cutting back on the research and development tax credit.

For manufacturers, the pain of a cut in capital allowances could be offset if the EEF can persuade Mr Osborne to change the allowances regime to let companies recoup investment costs over eight years rather than 30 at present.

Terry Scuoler, the EEF’s chief executive, said: “The Budget will be the first definitive test of the government’s ability to deliver both fiscal consolidation and the conditions needed to rebalance the economy. Industry recognises the remedy will not be pain free but will want to see a clear plan with all the bad news out of the way now.”

The BCC remains unhappy that the government intends to reverse only part of the 1 percentage-point increase in employers’ national insurance contributions planned for next April by raising thresholds, which it says will still leave businesses with an extra tax bill of £2bn-£2.5bn in 2011-12.

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