BUSINESS leaders today warned that the Treasury may have to underwrite finance to embattled SMEs if the credit market turmoil persists.
Releasing its latest quarterly economic forecast, the British Chambers of Commerce also called for cuts in business taxes and National Insurance as the Chancellor draws up his Pre-Budget report.
In a gloomy assessment of the UK economy, the BCC pr
edicted five quarters of negative growth – suggesting a recession will last until at least the end of 2009.
It also forecast unemployment of three million by mid 2010, up from the current 1.82 million, and warned government borrowing could exceed £110 billion in the coming year. The figures mirror recent City forecasts.
Alistair Darling is expected to unveil a multi-billion-pound fiscal stimulus package comprising tax cuts and spending increases when he delivers his Pre-Budget Report on 24 November.
The BCC said any "credible" package of measures would have to focus on business tax cuts. It argued that a reduction in National Insurance would be the most effective means of avoiding a sharp rise in unemployment.
But the business lobby group warned the government may have to play a "direct role" in the provision of finance to companies if credit markets remain paralysed.
Chief economist for the BCC, David Kern, said British business faced a "painful and prolonged" recession. "Given the urgency of the economic crisis and the Chancellor's limited room for manoeuvre, we believe the stimulus package should initially be focused on tax cuts," he said.
"Lower business taxes, and reductions in NIC (National Insurance] rates, are the most effective methods for limiting the threat of sharp unemployment increases."
Kern added: "The vital flow of bank finance to businesses is crucial, particularly smaller companies. If credit markets remain paralysed the government may have to play a direct role, either in guaranteeing finance or in providing it directly."
Outlining its own Pre-Budget wish-list, accountancy firm MacIntyre Hudson yesterday called on the Chancellor to focus on "carefully targeted measures which will help businesses work through the recession".
Among the proposals are a cancellation of the planned increases in the small companies rate of corporation tax, extension of tax relief on loans to finance small businesses and income tax relief for losses on rental businesses. Tax principal Nigel May said the government's main objective should be to "support the cashflow of businesses through the recession."
Bank of England Governor Mervyn King last week admitted that the UK economy was already in recession as he presented the central bank's latest inflation report.
He warned of the dangers of deflation on the economy and raised the prospect of interest rates falling towards zero per cent next year.
As a result, sterling has fallen dramatically against currencies including the dollar and euro.
The BCC today said the pound could plummet to "dangerous new lows" if markets interpreted the government's fiscal strategy as "reckless".
The full article contains 494 words and appears in The Scotsman newspaper.
