Tax rises 'could destroy recovery': Motor trade body warns Chancellor

MOTOR industry leaders yesterday warned the Chancellor, Kenneth Clarke, that raising taxes in this autumn's Budget could destroy the recovery in car sales and put thousands of jobs at risk.

Mr Clarke was also urged to stem the rise in value of sterling, if necessary by cutting interest rates, because of the damage a higher pound threatened to do to car exports.

Giving evidence before the Commons Trade and Industry Select Committee, the Society of Motor Manufacturers and Traders warned that a Budget that raised taxes could wreak havoc on car production lines.

The warning was reinforced by Ian Gibson, managing director of Nissan's Sunderland car plant, who told MPs that what the industry needed was stability, not rapid movements in exchange and interest rates or drastic changes in taxation.

Separately, Sir David Lees, chairman of the components manufacturer GKN, told the committee that the Chancellor should extend capital allowances if the Government was to help tackle the problem of underinvestment by industry.

New car sales have risen, year on year, in all but three of the past 15 months and for the first six months of this year they are up 9 per cent on the same period in 1992.

However, there are growing fears that a tough tax-raising Budget in the autumn, coupled with a further slide in export markets, could put the skids under the motor industry and lead to a sharp worsening in its trade deficit, which increased to pounds 2.9bn last year.

In written evidence to the committee the SMMT said that the industry's trade prospects would brighten over the longer term as production rose at Japanese transplant factories, lifting British car output to as much as two million by the end of the decade.

But in the short term the outlook was 'fairly discouraging', since contracting Continental markets would limit export prospects while the recovery in UK sales would lead to higher imports. It was 'absolutely essential' that the industry's competitiveness was not eroded by a continued rise in the pound.

Sir David, who is also chairman of the CBI's economic situation committee, said that first-year capital allowances of 40 per cent, a short-term measure introduced by the previous Chancellor, Norman Lamont, should at least be maintained.

He also dropped a broad hint that firms that failed to invest in training might have to be penalised in some way. Sir David ruled out returning to a levy system but said a way had to be found of balancing the interests of those who invested in training and those who did not.

GKN's British plants had narrowed the productivity gap on the company's other factories in the US, Spain, France and Germany but they were still at the bottom and would take three to five years to reach par.