City warns on dangers of a fiscal squeeze

BUSINESS leaders have sent a stark warning to chancellor George Osborne ahead of the Budget next week, arguing that substantial tax increases would threaten to derail the fragile economic recovery.

The Institute of Directors yesterday called on the government to set out credible, hard-hitting plans to cut the deficit quicker and further than the financial markets expect.

But it warned that the reduction plans need to be based “overwhelmingly” on a cash squeeze in public spending, reiterating recommendations for a 4:1 ratio of spending reduction to tax increases.

“Ideally all of the adjustment should fall on spending but if taxes are to rise the focus should be on indirect taxation,” the IoD said. “Higher direct taxation in particular would risk a double dip recession and also undermine the long-term incentive to work, save and invest.”

David Frost, the director general of the British Chambers of Commerce, said Osborne faces a “difficult balancing act”.

“The government must avoid punishing new taxes that negatively affect private sector growth,” he said.

“Short-term revenue gains would be outweighed by longer-term economic consequences, from reduced business investment to lower rates of job creation. If tax rises are unavoidable, they should be targeted at consumption taxes rather than payroll, income or profits.”

John Cridland, the deputy director-general of the CBI, added: “A radical re-engineering of public services is a must if damaging tax rises are to be avoided. Only an effective cost reduction strategy can safeguard future growth.”

Osborne will present the emergency Budget on 22 June.