Business confidence nosedives on tax increase fears: Optimism over economy fell by one-third in September. Robert Chote reports

BUSINESS confidence has fallen dramatically amid fears of tax increases in the Budget later this month, according to a new survey by the Institute of Directors.

The number of directors saying they were more optimistic about the economy than they were six months ago has fallen by a third from 63 per cent in August to 42 per cent last month. This measure of business confidence is lower than at any time so far this year.

Peter Morgan, director-general of the IoD, said the survey showed company performance was continuing to improve but tax increases could halt progress in its tracks. He urged the Chancellor to 'resist quick-fix tax increases to reduce the budget deficit and set cost reduction targets for Government as most businesses have to do to survive'.

The fall in business confidence mirrors the sharp drop in consumer confidence found in Gallup's monthly survey for the European Commission. But surveys out today from Infolink, the credit information company, and the Finance and Leasing Association suggest that demand from consumers and business confidence remains buoyant.

'With predictions about the Budget changing almost daily it appears that consumers are not being influenced by its prospect, even to the extent of considering to take on new credit commitments,' said Brian Bailey, Infolink's chairman.

Infolink reported that demand for retail credit was 8.6 per cent higher in September than a year ago, a higher rate of increase than in the previous two months. The Finance and Leasing Association found that consumer credit in September was 35 per cent up on 1992 at pounds 1,229m. Business finance was up by a less impressive 7 per cent.

A survey of smaller firms by the Confederation of British Industry also suggests that small companies are more optimistic than larger ones. Employment by smaller firms in the four months to October rose for the first time since January 1990, although over UK manufacturing as a whole it is expected to continue falling for the next four months.

The IoD survey found business confidence falling in all regions and industries. Confidence fell most rapidly in the Midlands and in distribution and personal services, both of which would be vulnerable to tax increases leaving people with less money to spend.

Confidence about company prospects fell less sharply, but also to a low for the year so far. But directors reported accelerating growth in business volumes, orders and profits.

Cash flow remains the biggest problem for most companies, with the number of directors fearing insufficient demand for their products falling significantly.

The IoD's findings are likely to intensify calls for any tax increaes in the Budget to be accompanied by a cut in interest rates.

City analysts expect that hopes of a rate cut around the time of the Budget will help to isolate the stock market and the gilt market from further falls due to fears of higher US interest rates. These sparked the biggest fall in the FT-SE 100 index for more than a year on Friday.