CBI calls for Brown to raise taxes by pounds 2bn

Interest rates will need to rise by a further percentage point to 7.5 per cent unless the Chancellor Gordon Brown increases personal taxes by pounds 2bn in the forthcoming Budget, the Confederaton of British Industry warned yesterday.

In its Budget submission, the employers' organisation said that a small fiscal tightening was necessary to keep inflation in check but that this should not be at the expense of business.

Adair Turner, Director-general of the CBI, said that unless action was taken to slow the growth in spending then the economy risked a return to the "boom and bust" of the past.

"However, we are cautious about relying solely on interest rates to curb demand since that could drive sterling up at a time when the high pound is already hurting the UK's export performance."

If taxes were to go up, then the increases should fall on individuals, not businesses, he said.

Although an extra penny on tax would raise pounds 2.1bn and be enough to satisfy the CBI, Labour fought the election on a pledge that the basic and higher rate of tax would not go up.

The CBI said the Chancellor would need to look hard at the remaining options - allowances, national insurance, VAT and excise duties. It opposes any cuts in basic tax allowances, the abolition of Miras, reduced reliefs on PEPs or Tessas and higher duties on petrol, alcohol or tobacco.

But it suggested that the Chancellor could raise a large amount of the pounds 2bn by limiting personal tax reliefs to the basic rate of tax rather than the higher rate.

The most widely touted corporate tax change is a further restriction on or even the abolition of tax credits on dividends, a move that would raise some pounds 4bn. But the CBI warned that this would be counterproductive as it would cut funds available for investment and reduce the actuarial value of pension funds, triggering higher dividend payments to tax-exempt funds or increased employer contributions.

The CBI said that, though it remained opposed to the windfall tax because it was retrospective, arbitrary and unfair, it accepted the tax would go ahead and agreed with the purpose to which the money would be put - retraining the long-term unemployed. But it said the Government must set out clearly who would pay, how much would be raised and how the tax would be levied.