Outlook: A dynamic economy needs a low tax business environment

Triumphant Tesco; Stock Exchange

It's a bit late to be telling the Chancellor how to frame today's Budget, but this is what he should be doing to achieve his long term aim of rising productivity and growth. Starting with the smaller measures first and working upwards, he should abolish insurance premium tax so as the compensate business for the soaring costs of compulsory insurance.

One hundred per cent allowances on all capital investment should be introduced to raise Britain's abysmal level of business investment, which despite a still growing economy has fallen more in Britain during the downturn than any other developed economy.

The climate change levy, a nonsense of an environmental tax if ever there was one, should be scrapped and replaced with a nil cost system for trading emissions. Tax on dividends would be abolished, allowing pension funds to begin rebuilding their assets and encouraging equity investment for the future. Stamp duty on share trading, already a voluntary tax for many, would be scrapped, again helping to restore an investment friendly environment.

Abolition of both inheritance and capital gains tax are also a must in any long term strategy to encourage wealth creation. As things stand the private sector is contracting, and with it the size of the tax base. To reverse these trends the Chancellor needs to cut business taxation sharply now.

The planned increases in national insurance, a payroll tax that will cost business and employees a combined £8bn this year, would be revoked, boosting business and consumer confidence alike. There are plenty of other similar business friendly measures that could be suggested, but best not to be greedy. Just the above wish list might cost upwards of £20bn a year, and that's not the sort of tax giveaway the Chancellor would think remotely possible given his plans for increased public spending.

Mr Brown must start to think differently if he sincerely wants the dynamic economy he aspires to. Just one percentage point of growth as generated by the private sector yields an extra £4bn of tax revenue a year. The Chancellor speaks a lot about the need to improve productivity so that Britain's trend rate of growth can be increased, but the money making capacity of an economy doesn't rise unless it is given the incentives to do so.

Competition policy, better education and training, all things the Chancellor has rightly targeted for improvement, make no difference at all if the tax burden is rising steeply in the meantime.

With the economy slipping towards recession, the Chancellor needs to be both cutting taxes and increasing public spending. Mr Brown's well-earned reputation for financial prudence is worth nothing if the economy goes down the pan while he's trying to defend it. We'll know by 1.30pm today whether any of the above wishes have come true. Don't hold your breath.

Triumphant Tesco

The Tesco success story seems to have become quite unstoppable. With like for like sales growth of an astonishing 4.1 per cent in the year to 22 February, Tesco is drawing ever further ahead of its rivals. "It has become a winners and losers market", Tesco's chief executive, Sir Terry Leahy, says, "and we are winning customers".

It's when a company is at its most triumphant that the moment usually comes to start worrying, but Tesco has been vanquishing its rivals for years now, and it would have to do something very wrong indeed to surrender the commanding lead it has built up. There's no sign of that. To the contrary, Tesco seems to have covered all points of the compass in making itself into a supermarket for everyman. Asda seems too downmarket, Sainsbury too upmarket, but Tesco has effortlessly encompassed both ends of the market at once.

What's its secret? Many and varied, Sir Terry would no doubt reply, but perhaps the major one has been not to get too greedy with the operating margin, which has been stuck at 6 per cent for more than five years now. Anything more is immediately hurled back at the customer encouraging a virtuous circle of greater efficiency equals lower prices equals more volume equals greater efficiency.

Asda might provide a credible challenge to Tesco if it were allowed to takeover the bulk of Safeway, but it is hard to see any of the other alternatives outcomes for Safeway takeover battle significantly ruffling Tesco's feathers. As the weakling of the sector, Safeway finds itself more in Tesco's sights than any other right now, and the best possible outcome for Tesco would be for Safeway to be left alone to suffer slow death by a thousand cuts. Philip Green is a formidable retailer, but I don't fancy his chances caught between the pincer movement of Tesco and Asda.

If Tesco has an achilles heal, it would seem to lie in its overseas expansion strategy. Overseas now accounts for approaching half of all Tesco's selling space. So far, it's worked, but overseas is where it first started to go wrong for Marks & Spencer. Investors seem confident history isn't about to repeat itself, but if there is a risk at Tesco, the hugely ambitious overseas strategy would seem to be it.

Stock Exchange

Don Cruickshank, chairman of the London Stock Exchange, once described this one-time pillar of the City establishment as "just another bog standard, medium-sized, publicly quoted company". The language was unfortunate and given that he was already chairman at the time, almost certainly inappropriate, but the sentiment was also brutally correct. First stripped of its closed shop status, then its regulatory functions, and now divorced from its "member" owners, the LSE is indeed just another company, and not a particularly big one either.

None the less, the position of chairman is still meant to carry a certain cache and status within the City, so the appointment of a complete unknown, Dr Chris Gibson-Smith, to succeed Mr Cruickshank, comes as a bit of a surprise. Where was the City grandee that traditionally occupies this post? Once upon a time the honour would have gone to the senior partner of Cazenove or some such other City blue blood, but there's no David Mayhew or Michael Marks to adorn the letterhead this time around.

Not necessary, Clara Furse, the LSE's chief executive, would say, for today the LSE must stand on its own two feet as one of a number of competing electronic exchanges all striving to eat other's lunch. To appoint a big City name to the post would offend as many users as it pleases, so a good case can be made for a relatively anonymous businessman. Let's hope he proves a bit better than bog standard, for there are plenty of challenges ahead.

The LSE has developed well since the debacle of its failed merger with the Deutsche Börse, piling on the volume as trades have switched with growing confidence to Sets, the exchange's electronic order book, and attracting no less than 72 per cent of all new listings in Western Europe last year. The latter statistic may owe more to the sickly state of the major European economies than the LSE's own prowess, but it's still an achievement none the less.

The big question is where to go from here and on that Dr Gibson-Smith is wisely keeping his counsel. Ms Furse has proved an excellent chief executive but there is no doubt that she made a big mistake in refusing to pay Sir Brian Williamson's price for Liffe. Derivatives have been the big growth area for securities trading in recent years, and for those who are a part of it, an effective hedge against the bear market in equities. Liffe went instead to Euronext, an amalgam of the Paris, Dutch, Belgium and Portuguese exchanges, leaving the LSE as still by far the largest of the European cash exchanges but also as a bit of a one trick pony.

The LSE's strategic importance at the heart of Europe's largest financial centre makes it quite a prize in a consolidating market of European monopolies, but it is not clear that either Frankfurt or Paris could afford the required premium.

jeremy.warner@independent.co.uk