Tax lure tempts UK plc abroad

Gordon Brown is fighting a losing battle to shore up business tax revenues against a 'cold blast' of competition from lower-tax countries, the Ernst & Young Item Club economic thinktank warns today.

With some central European states now charging a 'flat tax' of less than 20p on both profits and income, Item Club expert Peter Spencer says an exodus of British firms will make it impossible for the Chancellor's tax and spending sums to add up.

'We are simply going to lose jobs and companies to the east, possibly via Germany,' Spencer says. 'The City is not going to decamp en masse to Bratislava overnight, but they could start by taking more of their profits in Frankfurt.'

In a bid to kick-start German growth, Chancellor Gerhard Schröder recently promised to cut the starting rate of corporation tax to 19 per cent, well below the standard 30 per cent paid by most British firms.

The Treasury is banking on a surge in company tax revenues over the next few years to meet the Chancellor's 'golden rule' of balancing his budget over the economic cycle. 'We don't know how strong these effects will be, but what you can say is that the kind of stupendous 30 per cent growth rates in corporation tax revenue the Chancellor is expecting are simply not feasible,' he says.

The Institute for Fiscal Studies last week. predicted that whoever is in Number 11 will have to raise taxes, or cut spending, by £11bn if the golden rule is to be met over the next economic cycle.