THE British Chancellor was yesterday urged not to raise taxes on business in his Budget in the face of falling profits because of the effects of strong sterling.
Sterling's strength has already hit company profitability which fell for the first time in over a year in the first quarter of 1997, according to Experian, the information services company.
The return on capital achieved by British companies fell from 12.43 per cent to 12.07 per cent during the first quarter.
"The latest figures confirm Experian's warning in its latest report that the economy was finely balanced," said Mr Peter Brooker of Experian.
"On the surface, the economy appears to be healthy but there are strong signs that declining competitiveness is hitting exports and that the prospect of further, possibly steep, rises in interest rates, is deterring companies from making the investment necessary to ensure continued growth in the economy."
The Bank of England and the capital markets are worried that building society share windfalls will push up inflation beyond the Government's target and are calling for interest rate rises to counter those inflationary pressures.
"Unfortunately, this will also raise the strength of sterling and suck in even more imports rather than make homegrown products more attractive.
"As a result, the prospects for company profitability over the next year are not encouraging."
Figures from Experian show that, in real terms after allowing for inflation, British profitability fell for the second consecutive month in the first quarter of the year from 9.8 per cent to 9.37 per cent.
It said that while that figure was considerably higher than during the depths of the recession, it was a clear sign the economy appeared to have come to a halt.
Having promised during the election campaign not to raise income tax, the temptation will be to push up taxes on companies in addition to the windfall tax on the utilities.
"With interest rates on the way up again, this would be a shortsighted measure, given the need for industry to invest to rebuild our industrial base and in training," Mr Brooker added.
