His decision will be seen as a direct snub to the manufacturing sector, which had been pressing for a continuation of 40 per cent capital allowances to encourage investment in plant and machinery.
The proposal was at the heart of the Budget submission put to Mr Clarke by the Confederation of British Industry in September. Manufacturing investment is 22 per cent down on its level four years ago.
Capitalising on the Prime Minister's conversion to the cause of manufacturing industry, the CBI argued that the Chancellor's main task was to produce a Budget for investment and jobs.
In the past few days, however, the CBI is understood to have dropped the request for a higher allowance and gone back to Treasury officials with a watered-down proposal.
The CBI is now urging Mr Clarke either to continue with 25 per cent capital allowances each year - but on a straight-line basis allowing the full amount to be set off against tax in just four years rather than a reducing balance basis, which allows a quarter of the investment against tax in the first year, followed by a quarter of the remainder in following years. Alternatively, the CBI would like a 100 per cent capital allowance on investments of up to pounds 200,000 to aid smaller companies.
The 40 per cent allowance was announced by Norman Lamont in last year's Autumn Statement. However, he stressed then that it would be available for only 12 months. The cost of the measure to the Exchequer was estimated at pounds 700m by the end of 1994/95.
The Treasury appears to have ruled out a continuation of the higher allowance on the grounds that the tax break was only intended to be temporary and that lower interest rates are succeeding in persuading firms to invest. The decision will dismay other industrial lobbyists, such as the Engineering Employers Federation, which also put higher capital allowances at the top of their Budget submissions.
The CBI's latest quarterly industrial trends survey, published last month, showed investment intentions at their best level for four years. Even so, they remain weak, with more firms planning to cut spending on plant and machinery than increase it in the next 12 months.
Howard Davies, the CBI's director-general, said yesterday that he still expected the Chancellor to heed the CBI's plea to avoid tax increases that would add to business costs. But he thought the Budget might contain a 'few ticking time bombs' in the shape of deferred tax rises.
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