Alistair Darling should increase tax breaks for investment in this month’s Budget, according to a manufacturers’ group.

The EEF warned that the sector faced the worst trading environment for more than three decades.

The group, representing engineering businesses and other manufacturers, urged the chancellor to raise the annual investment allowance from £50,000 ($74,405) to £250,000.

Steve Radley, EEF chief economist, said a short-term measure to promote investment was needed to offset the less favourable environment created by previous changes to the tax system. “Decisions on capital expenditure that are delayed or reversed now will have consequences for competitiveness come the upturn.”

The EEF also called for the introduction of a temporary scrappage incentive scheme for the motor vehicles sector, in its Budget submission published along with 12 other manufacturing organisations.

Other short-term measures needed to help the sector included the restoration of empty property relief for business rates, a temporary extension of research and development tax credits to big companies engaged in low-carbon projects, measures to underwrite trade credit insurance and a postponement of increases in the climate change levy and landfill tax. Mr Radley said: “Without further action we risk further hollowing out of the supply chain and the loss of viable companies in key sectors.”

The rising level of distress in the manufacturing sector was reflected in a report by Ernst & Young, the professional services firm, which said a “staggering” 16 per cent of companies in the industrial engineering sector issued a profit warning in the first quarter of this year.

Overall, quoted companies issued 117 profit warnings in the first quarter, which was the most since 2001 and 3 per cent above the same period last year.

Keith McGregor, a partner at Ernst & Young, said: “It is not just the number of warnings that concerns us: the tone of company statements has also darkened.”

Confidence among British businesses remained weak in March, in spite of a slight increase in optimism over activity levels, according to the latest Lloyds TSB Corporate Markets Business Barometer. The balance of companies that expected higher, rather than lower, activity over the next 12 months rose one percentage point to -4 per cent from -5 per cent in February.

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