Ministers urge tax boost for gentle recovery

Ministers are considering changes in capital gains tax in the Budget to encourage long-term industrial investment. The proposal is the latest sign that the Treasury is under pressure to ensure that the Budget helps, rather than hinders, economic recovery.

The proposal surfaced yesterday as John Major warned against assumptions that Britain would climb out of recession 'with great speed'. As Treasury ministers and officials ended a two-day summit at Chevening, Kent, the Prime Minister told the Cambridge Evening News: 'It will be a gentle recovery. We have seen some signs of it but I want to see them take root before I start dancing on the table.'

Although Whitehall was yesterday trying to play down reports that ministers are considering ways of phasing out mortgage interest relief, the Government accepts that long-term restructuring of mortage relief - which will cost pounds 5.2bn this year and remained sacrosanct throughout Margaret Thatcher's premiership - is now a subject for debate.

The Prime Minister's remarks will be seen by Cabinet opponents of tax increases as support for their contention that the recovery is still too fragile to sustain an immediate all-out effort to curb the borrowing requirement - now expected to be about pounds 50bn for the next financial year.

One possible change to the capital gains regime - which has not been significantly amended since Nigel Lawson's 1985 Budget - would increase penalties for short-term capital gains, while reducing them for longer-term investments. Some leading businessmen believe this would unlock resources for research and development, for example.

Fears are growing in Whitehall that unemployment next month might pass the record of 3.1m set in 1986. Plans for a new temporary work scheme to help up to 250,000 of the long-term jobless are a top priority for a seminar that Mr Major is holding with key policy officials tomorrow.

There is a growing expectation in Whitehall that VAT will be extended to cover items that include public transport, fuel and power, newspapers and books, and children's clothes. But there is a fierce argument over timing. Even ministers who accept the prospect of increases in indirect taxes believe that they could choke the recovery if they are imposed as early as March.

The budget calculations will be complicated by proposals from the Department of Trade and Industry for a direct subsidy of up to pounds 700m a year to solve the row over plans to close 31 coal mines. A confidential Whiehall memorandum from senior DTI officials recommends a five-year subsidy which would allow several pits to remain open while planned privatisation of the industry goes ahead. Keeping about half of the threatened 31 pits open could cost pounds 400m a year.

Even the maximium subsidy would cost less in the first year than the pounds 1bn redundancy and closure costs of the original plans approved by Michael Heseltine, President of the Board of Trade, and defeated by a backbench Tory revolt in October. But over the whole period it would mean a substantial added cost. Under the DTI's proposal it could be met by the taxpayer or by a levy on electricity. The issue is to go to the full Cabinet.

Meanwhile, the Department of National Heritage is pressing for a package of big tax breaks in the Budget to reverse the decline of the ailing British film industry. This could be at the centre of a new departmental strategy for the promotion of sport and arts. Proposals for tax relief are thought to have been on the agenda at Chevening.

Although the Treasury granted a small tax concession to the film lobby in last year's Budget, the Department of National Heritage acknowledges that this has not been enough to revive the almost- moribund industry.