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The coalition should bring down the axe on welfare and social spending while shielding capital investment contracts for the private sector and keeping taxes low, business leaders say.
Public spending should be cut sharply and tax rises kept to an “absolute minimum” in the June 22 emergency Budget, says the CBI employers’ group, arguing that higher taxes would undermine the economy’s ability to grow.
The group has asked George Osborne, the chancellor, to stick “as close as possible” to the 4:1 ratio of spending cuts to tax rises proposed in the Conservative manifesto rather than the 2.5:1 favoured by the Liberal Democrats.
It also wants the government to focus on cutting current spending – radically reshaping public services to deliver more with less – rather than reduce expenditure on capital infrastructure. Capital spending on infrastructure, due to fall to 1.25 per cent of gross domestic product under Labour’s plans after the Olympic Games in 2012, must return to 2.25 per cent as soon as conditions allow, the CBI says.
The group welcomes proposals to speed Labour’s deficit reduction plans but has “major concerns” about the proposal to increase capital gains tax from 18 per cent closer to income tax levels.
Though generous exemptions have been promised for entrepreneurs, the CBI says it wants a broad definition of business assets to prevent disincentives to investment or start-ups. The tax should be structured to minimise the impact on long-term investment by some form of inflation indexation, it says.
The group also warns that the coalition’s plan to focus the research and development tax credit on high-tech companies, small businesses and start-ups as a result of Sir James Dyson’s innovation review will be “damaging”.
Richard Lambert, CBI director-general, told Mr Osborne the credit should be available to companies of all sizes and sectors. It had generated significant activity in areas such as automotive, pharmaceuticals and space and helped transform processes in lower-tech sectors.
The CBI did not include a value-added tax increase among the “most distortive” rises it wants to avoid, but emphasised that all tax increases should be kept to a minimum. John Cridland, deputy director-general, said: “This needs to be a bold and ambitious Budget, with a credible pathway for restoring sound public finances and a convincing narrative for growth.”
Ian McCafferty, the CBI’s chief economic adviser, expected fiscal tightening of £60bn-£70bn to eliminate the structural current budget deficit by 2015-16, a year earlier than Labour planned. Cuts on that scale would be a “headwind” to recovery but the risks of provoking a double-dip recession were “very low”.
There should be a “radical re-engineering” of public services that could, for example, save more than £8bn by 2015-16 by treating more patients at home.
The CBI welcomes plans to continue with a loan guarantee scheme for small and medium-sized businesses and praised the Enterprise Finance Guarantee scheme. It urges ministers to look again at Labour’s planned changes in the tax treatment of pensions, due next year, and would put forward alternative proposals shortly
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Source: The Financial Times