Letter: Capital allowances would aid small firms

Sir: In 'Forget capital allowances' (View from City Road, 11 October), you suggest that capital allowances are often harmful. That is not so.

The Institute of Fiscal Studies estimated that the temporary change in allowances introduced by Norman Lamont was likely to have bolstered investment by 6 per cent between November 1992 and October 1993. (Although investment may have been slightly lower in subsequent years as the effect would have been to bring some investment forward.)

We agree that the tax system is not the main factor driving investment - CBI surveys show the main constraint on investment is uncertainty about demand. But increased first-year capital allowances would offer some short-term cash-flow advantages that may be particularly helpful to business when the economy is emerging from a period of recession.

For smaller companies, cash- flow considerations are especially important. These companies would be the main beneficiaries of our proposal to introduce a 100 per cent first-year capital allowance for the first pounds 200,000 of capital spending.

Yours faithfully,

KATE BARKER

Director of Economic Affairs

Confederation of British

Industry

London, WC1

12 October