CBI: Budget must fix UK's public finances

Deep spending cuts or tax rises threaten recovery

The CBI is calling on the Chancellor to use the Budget to spell out a "credible plan" to fix the public finances – but it has rejected the idea of immediate deep cuts in public spending or hefty tax increases in a post-election emergency budget.

An earlier date for budget balance should be achieved through a combination of lower overall spending and public service reform, says the CBI, rather than through "resorting to damaging tax rises at a time when the economy is still fragile". Alistair Darling's Budget is widely rumoured to be scheduled for Wednesday, 24 March.

The director-general of the CBI, Richard Lambert, warns that the British economy is "bumping along the bottom at very low levels", and urges ministers to protect business and employment by cancelling the planned rise by 1 percentage point from April 2011 in National Insurance Contributions (NICs) from employers .

He says that most CBI member firms are "cautious, even anxious" about the outlook for growth. The situation in the eurozone, by far the UK's largest export market, and the lack of action on exports in general are other key concerns. The continuing contraction in bank lending to small and medium-sized enterprise – down by another £4bn in December – is also discouraging. But "the planned rise in national insurance contributions is particularly ill-judged. It is a direct tax on jobs and should be reversed".

In a letter to the Chancellor, Mr Lambert urges him to bring forward the Government's scheduled date of 2018 to balance the public finances. This should be planned for 2015-16, he says, and criticises the Treasury for being "not ambitious enough" about bringing it down. The CBI wants to see cumulative cuts of £50bn in current public spending by the middle of the next decade, with capital spending protected and tax rises avoided to help to preserve a business-encouraging climate.

The CBI says that delivering a credible plan for the public finances is the "key to addressing concerns" and keeping the UK's AAA credit rating.

Mr Lambert added that he is "confident" that Britain's AAA rating is "sustainable". He said: "This Budget comes at a pivotal moment for the UK economy. Investors are clearly jittery about sovereign debt, but are prepared to give the UK the benefit of the doubt until after the election."

As well as reversing the planned rise in employers' NICs – the so-called "tax on jobs" – the CBI wants to see the research and development tax credit preserved, even if the overall rate of corporation tax is reduced. The Tories are proposing to cut the rate and pay for it by abolishing reliefs and allowances.

Mr Lambert said current concerns of the possibility of a hung parliament after the next election were "slightly overplayed". "The world spins on. It's what democracy's all about," he said.

On taxation, the CBI says that the combination of changes to capital gains tax, national insurance, personal tax, non-doms and the taxation of pensions has "served to increase significantly the burden of tax upon more mobile wealth creators". "The cumulative effect of those changes increases marginal tax rates for those on high incomes," he adds.

Meanwhile another business group, the Institute of Directors (IoD), is publishing its Business Manifesto this morning, calling for immediate action on the public deficit after the general election – providing it takes the form of lower spending rather than higher taxes.

The group disputes the "persuasive" argument that lower public spending in the short term will threaten recovery, claiming instead that such measures could trigger a series of developments to assist growth, such as lower gilt and bond yields.