Government urged to cool economy by raising taxes

The next government should raise taxes rather than interest rates to cool down the overheating economy, a leading business organisation said yesterday. The British Chambers of Commerce warned of wage pressures at home because of skill shortages and damage to sales overseas because of the strong pound.

This analysis is backed by a new forecast from the London Business School published this morning. It predicts that growth will exceed 3 per cent this year, taking the number of unemployment benefit claimants below 1.5 million. Tougher policy action is needed to head off an inflationary boom, the report concludes, and taxes should be used to take some of the strain off interest rates.

Both followed a similar call by the Confederation of British Industry on Wednesday.

Official figures on Britain's recent trade performance published yesterday showed tentative signs that the increase in sterling during the past six months has started to hit export volumes. The BCC survey was the latest in a series reporting a tailing off in new export orders.

Yesterday's survey, which covers services as well as manufacturing, reported the lowest exports for four years. In manufacturing sales growth had continued to slow, while in services the growth had slowed from its record level in the final quarter of last year.

The weaker export outlook was offset by the strength of domestic demand. Official figures for national output in the first quarter of this year, due this morning, are expected to show growth well above the economy's sustainable trend.

Job creation plans remained buoyant, according to the chambers of commerce survey, with services companies' planned employment at the highest level this decade. But this was leading to recruitment difficulties.

David Richardson, BCC president, said there was a danger skill shortages would fuel wage inflation. "The priority must be to tackle the skills problem which is swiftly becoming the Achilles' heel of the British economy," he said.

Ian Peters, deputy director-general, said: "Whilst many commentators believe that interest rates will have to rise after the election in order to contain inflation, this will have the damaging effect of hurting manufacturing investment and export competitiveness."

Separate figures yesterday showed the gap between imports and exports had widened.

The deficit on trade in goods rose to pounds 758m in February from pounds 535m the previous month. March's deficit with non-EU countries increased to pounds 606m from pounds 437m in February.

Lower import prices kept the import bill subdued. The underlying volume of imports in the latest three months' figures was 6.4 per cent higher than a year earlier. Export volumes were up 6.2 per cent over the same period, but fell 1.5 per cent in the latest month and were virtually flat in the latest three months.