Does business have a prayer on Budget day?

Chancellors persistently ignore industry's advice - at a price
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The Independent Online
Ten Years ago David Henderson, head of economics at the Organisation for Economic Co-operation and Development, made himself unpopular by writing a book called Innocence and Design. He used it to launch an assault on "do-it-yourself economics", which he described as "unchanging, timeless and often deeply felt" even if "intuitive and self- generated".

Samuel Brittan, the cerebral Financial Times commentator, was one of the few to support Mr Henderson. He preferred to call do-it-yourself economics "businessman's economics" which, he said, consisted of "populist fallacies".

On Tuesday, the various business lobby groups will see whether their lobbying to the Chancellor has been accepted or ignored. On past form, they should not be too optimistic: our table suggests that the Treasury eggheads who draw up the Budget are more likely to use business submissions as place mats than as a basis for policy. The eggheads have little more regard for businessmen's economics now than Brittan or Henderson did a decade ago.

Fortunately for companies, politicians also have some influence on the Budget, which is why in the depths of the last recession the Chancellor even managed to exceed business expectations - for example, by reversing the Scrooge-like policy on export credit support in 1993.

And fortunately for the government, or at least this one, most business people are unwilling to criticise the Tories - which is why the Budget is nearly always followed by mutterings of "splendid, splendid" from the corporate corner.

Nevertheless, the gap between the Budget-makers and business is wide. It is in essence a gap between theoreticians and doers. The theoreticians believe the doers are incapable of seeing the wood for the trees, and let their own self-interest stand in the way of broader policy. The doers believe that because economists and civil servants have never had to make or sell anything in their lives, they have no idea of how the real world works.

Until the Thatcher government arrived in 1979, the gap was less of a problem. Economic policy was based on pragmatism more than ideology. Up to the Second World War, a theoretical adherence to free trade was tempered by Imperial Preference and a belief that unfettered competition was a bit off. Cartels were normal and the Monopolies Commission was not given teeth until the late 1950s.

In the 1960s, the government tried to cosy up to business: when there was a slowdown, it reacted in Keynesian fashion by increasing public expenditure. In the 1970s it was so busy trying to control inflation and the unions, that any thoughts of ideology were forgotten. But when Sir Keith Joseph's pure free market theory arrived with Margaret Thatcher, business got a shock.

With the economy already spinning into recession in March 1980, the Chancellor, Sir Geoffrey Howe, introduced a savagely deflationary budget. It was the first time since Keynes had cornered the market in economics that a government had reacted to downturn by cutting instead of spending.

Later that year - with interest rates and Sterling sky high - Sir Raymond Pennock, president of the Confederation of British Industry, said that "competent, proven companies are finding it impossible to compete". The 1979 CBI conference had given a rapturous welcome to the new government. A year later, Sir Terence Beckett, its director-general, called for a "bare knuckle fight" with the Chancellor. Howe was unrepentant: his 1981 Budget was unexpectedly harsh, pushing direct and indirect taxation up. The CBI's central demand, to reduce the national insurance surcharge, was ignored.

These Budgets marked the triumph of the theorist. Sir Keith and his fellow monetarists believed British industry needed harsh treatment to be booted out of its complacency. Many younger business people agreed with them and formed a core of Thatcherites that continued (and continue) to believe that as long as the trend is towards minimum intervention by government, industry should take whatever is thrown at it without whingeing.

But the majority of business people believed the ideologues had gone mad. In particular, they disliked the government's belief that services were every bit as valuable as manufacturing. High Noon came in 1985 when the House of Lords Select Committee on Overseas Trade listened to evidence from the Treasury and industrialists. Their lordships were less impressed by the economists' view that the North Sea had replaced manufacturing and this was normal, than they were by the likes of Lord Weinstock of GEC. "What will the service industry be servicing when there is no hardware, when no wealth is actually being produced?" he asked. "We will be servicing, presumably, the production of wealth by others. We will supply the Changing of the Guard, we will supply Beefeaters around the Tower of London."

This is the sort of thinking that Sam Brittan and David Henderson attacked. Brittan said it belonged to a "pre-economic theory" called Manifest Economic Destiny. "It is often ascribed to manufacturers, where any self-respecting country is expected to have a trade surplus," he wrote. The argument has continued to roll: it is as obvious to most business people that manufacturing is economically more valuable than services as it is to economists that it isn't.

Not all business groups have wanted the same thing. The Institute of Directors has long followed the "young Thatcherite" line, pressing for ever more tax cuts. The small business lobby has tended to demand more intervention: in 1993 the Forum of Private Business demanded a two-tier interest rate - with small businesses paying less - and the creation of a government-backed credit institution. Those were the sort of ideas that might have been contemplated in the UK in the 1960s, or on the Continent now, but they did not stand a chance - even in a post-Thatcherite atmosphere.

The CBI has tended to steer the middle course - or has taken the wishy- washy option, depending on your viewpoint. Its submissions have always tried to reflect what it believes is best for the economy, rather than just the business interest. Yet, as the table shows, it has been repeatedly ignored on its main demands, and has not done much better on the detail. During the 1980s it warned repeatedly against tax cuts, saying that lower interest rates should be given priority. Again and again, the government cut taxes.

In retrospect, business can claim it was right. Tommy Macpherson, chairman of the Association of British Chambers of Commerce's Economic and Industrial Committee, said in 1986 that tax cuts were dangerous because "a seriously high proportion of the released revenue would go into imports". Two years later the Chancellor had to hike interest rates sharply to choke off the flood of imports.

Since the 1990 recession (and the departure of Mrs Thatcher), business has done a little better. It wanted a cut in corporation tax then, and it got it, and in 1993 - when government finances were at their tightest - the Chancellor gave a significant boost to exports by liberalising export credits insurance arrangements. Nick Boucher, planning director of Glynwed International and a member of the CBI's Economic Prospects Group, believes this could be because companies have learned to play the economists' game. "Business has become better educated about what it thinks it can get from a Budget," he says.

But the most persistent business demand - that companies be allowed to write off against tax part of their spending on plant and machinery - has been ignored every time it has been made. Allowances of this sort were cut right back in the 1984 Budget, at the same time as corporation tax was slashed, and companies have complained ever since that, as a result, they have not been able to build their productive potential. Investment allowances have become a symbol of the battle between the Treasury and the business community. If the Chancellor gives way this Tuesday, business really should cheer. But it shouldn't hold its breath.

The wish lists

Year What business wanted What business got (mainly from CBI (from the Budget) submissions)

1986 No cut in income tax 1p cut in basic rate

Introduce training vouchers No, but training boost Over-index tax allowances Allowances indexed Cut National Insurance No

1987 Help small firms VAT tweaked

Over-index personal allowance No

100% allowances on first pounds 25,000 No of capital investment

Tax cuts should be "modest" - . 2p cut to 27p, not pounds 2-3bn as forecast costing pounds 2bn Fines for paying bills late No

1988 Cut top rate of marginal tax, Basic rate cut to 25p not general rate Top rate cut to 40p Encourage small firm enterprise, No cut corporation tax, NI and rates

1989 Cut corporation tax from No, but more firms 35% to 25% to pay low rate No further cuts in personal tax No cuts

1990 Increase capital allowances No

Cut corporation tax No

Change ACT so international No companies can get relief

1991 Cut corporation tax 1p cut Raise depreciation allowances on No capital equipment from 25% to 40%

1992 Raise depreciation allowances on No capital equipment from 25% to 40%

Freeze business rates No

Abolish car tax Tax halved to 5%

1993 Write off up to first pounds 200,000 of No

spending on plant

Avoid temptation to raise taxes Biggest post-War indirect tax rises Leave special interests alone Better export credits

1994 "Modest" cuts in business tax Some help on rates

100% depreciation on first No pounds 200,000 invested

Cut public spending Sharp cuts pledged

1995 Don't cut tax, except on small firms Taxes not cut

Preserve transport infrastructure Road spending cut Help lower paid NI changes help

Cut corporation tax for smaller No firms from 25% to 20%

100% allowances on first pounds 200,000 No of capital spending

What business wants this year

CBI submission: "A time for prudence"

q Cut government spending by pounds 3.3bn, to lower inflation; maintain spending on transport, education, training and export support.

q Introduce 100 per cent first year capital allowance on first pounds 200,000 of plant and machinery investment.

q Introduce 2 per cent a year writing down allowance on new commercial buildings.

q For smaller firms: improve Enterprise Investment Scheme; lower rate of corporation tax; make raising equity tax deductible.

q Help people moving from unemployment into work.

q More generous transition for the Uniform Business Rate.

q Freeze, at least, excise duty on alcohol and tobacco.

q Any personal tax cuts should be through higher allowances, not a lower rate.

Engineering Employers Federation: "A Budget for Investment and Growth"

q No increase in corporation tax.

q For firms employing up to 500 people, the first pounds 250,000 of plant and machinery spending to be fully allowable against tax in the first year (or an alternative formula over three years).

q Long-term expenditure on transport and other infrastructure.

q Employers to offset "lifetime learning" training costs against tax, and get National Insurance rebate for accredited schemes.

Institute of Directors: "Getting back on track"

q Cut public spending by pounds 7bn.

q Move towards abolition of capital gains and inheritance tax.

q No cuts in income or corporation tax.

q No increase in capital investment allowances.

q Dilute proposals to restrict the recovery of VAT from Customs & Excise.

q Cut excise duties on beer and tobacco.

Forum of Private Business

q Introduce statutory payment of interest on overdue bills.

q Reduce employers' NI contributions; integrate PAYE and NI.

q Reform business rating system, gearing it to the size of the business not the premises. Or, reduce the business rate level.

q Eliminate tax on retained profits.

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