As the Chancellor and his Treasury team gather at Dorneywood today for a key Budget strategy meeting, business leaders have warned Kenneth Clarke not to axe capital projects to pay for tax cuts.
"We are worried about a strategy for the Budget which involves significant cuts in capital expenditure to pay for tax cuts," said Adair Turner, director- general of the Confederation of British Industry. "The government has to be very careful of action that is in danger of causing a major setback in the construction industry."
"The danger is that once again they will mortgage the future to pay for short-term tax cuts," said Sir John Banham, chairman of Tarmac and a former CBI director-general.
A particular concern is that the government may slash capital spending programmes under the guise of a further expansion of the Private Finance Initiative. The PFI, which was launched in 1992, aims to get the private sector to finance capital projects which were formerly undertaken only by government.
The CBI is in favour of the PFI, but Mr Turner said that "we are very wary about the argument that the PFI can fill the gap because our members tell us there are teething problems." He added that "there was a worry about counting chickens before they're hatched".
Progress with the PFI has been modest to date, with only pounds 500m invested up till the end of the last financial year, 1994/5. The Government has said, however, that it expects to let contracts this year leading to around pounds 5bn of capital investment, of which nearly pounds 3bn is the channel tunnel rail link.
According to Douglas Hogg, chief executive of the Private Finance Panel - set up in 1994 after criticism of the scheme's lack of progress - the PFI has achieved considerable momentum. He pointed to over 500 projects in the pipeline for the health service worth pounds 2bn. But few of these schemes have yet produced any actual expenditure - only pounds 100m of capital spending has resulted in the health service so far.
CBI members say that there is a gap in capital expenditure before the PFI "kicks in." And one City financier involved in the schemes said that the Treasury is cutting back on public investment before projects funded through the scheme actually materialise. Gross public investment is already projected to fall by 10 per cent next year from its level in 1994/5.