Heseltine admits industry decay: Budget blow to Lamont. Board of Trade President reluctant to publish indictment of British manufacturing

AS NORMAN LAMONT prepared his 'Budget for jobs' with short-term measures to help the long-term unemployed, Michael Heseltine was under pressure yesterday to publish a confidential report warning that it would take years for Britain's manufacturing base to recover from its fundamental weakness.

The President of the Board of Trade said he agreed with the main findings of the report - described as 'explosive and damaging' by Labour. It came as an eve- of-Budget blow for the Chancellor of the Exchequer, who is planning to couple around pounds 2bn in tax increases with a package of proposals for the long-term unemployed and jobless young people.

Labour will today demand publication of the report but Mr Heseltine is reluctant, on the ground that it would help Britain's competitors to target British weaknesses. The report, by the DTI industrial competitiveness unit, was commissioned by Mr Heseltine and found that, in spite of the competitive exchange rate policy since Britain was forced out of the Exchange Rate Mechanism, the country's main source of new products is imports and its product base is weak and deteriorating and will take years to put right.

Asked whether he accepted that, Mr Heseltine said: 'Yes I do . . . This is the culmination perhaps of 100 years of cultural separation of many aspects of our society and the manufacturing base.'

The Prime Minister - who first signalled the higher priority for manufacturing in the Independent - was masterminding a dialogue on the report right across

government, Mr Heseltine said.

Robin Cook, Labour's trade and industry spokesman, told a Labour conference in Scotland: 'The report confirms . . . if the present trend continues, this government will have fewer people at work making things than we have people out of work making nothing. That is the shame that Britain faces.'

It will intensify the pressure on the Chancellor for action on unemployment. Sir Edward Heath, the Conservative former Prime Minister, and Gordon Brown, the Labour spokesman on treasury affairs, were united during the BBC Breakfast with Frost show in demanding that action on unemployment be the centrepiece of the Budget strategy.

'Whatever he does about taxes, I do not think people will really regain confidence until unemployment stops rising. People who fear for their jobs will not spend money and will not invest,' said Sir

Edward.

Mr Brown said 'the major challenge' for Mr Lamont would be measures for the long-term jobless and those under 25 on the unemployment register. He also accused the Chancellor of seeking alibis in his interview in the Independent on Sunday yesterday.

There were clear hints that the tax increases will be more modest than feared. One Cabinet source said: 'He has got two Budgets this year. The most important thing is not to stop the recovery.'

The small net tax rise will be presented as a first step in a long- term programme of attacking the Government's spiralling budget deficit, forecast last November to reach pounds 37bn in this financial year.

Apart from the promised rise in motoring taxes to pay for the cut in car tax announced in November, Mr Lamont is thought to have considered three main options in his quest for more revenue:

A rise in employees' and employers' National Insurance contributions of 1 percentage point. The Chancellor has also considered stealing some of the Labour Party's clothes by levying the employees' 1 per cent increase even on incomes above the pounds 420 per week NICs ceiling.

An extension of VAT at 5 per cent to items such as books, children's clothes and fuel.

An reduction in the effective value of mortgage tax relief.

Last autumn the Chancellor deferred an increase in NICs only because of the severity of the recession. But he is now expected to point to the strength of car sales, high-street spending, the money supply and survey evidence about business and consumer confidence as proof that the recovery is genuinely under way.

The Chancellor's tax-raising measures in this Budget may foreshadow much more wide-ranging plans to extend the VAT base in the November Budget.

Lessons of history, page 2

Gavyn Davies, page 23