Business groups welcomed the size of the fiscal boost announced by the Chancellor but gave a warning that the plan to raise national insurance contributions by 2011 would hit employers hard and act as a brake on employment. They also questioned whether the reduction in VAT would boost spending.

Miles Templeman, Director-General of the Institute of Directors, said: “The increases in national insurance amount to substantial and apparently permanent tax increases, even for people on average incomes . . . This will be a new tax burden on employment just when employment should be recovering.”

Mr Templeman said that the scale of the overall boost was in line with what the IoD had pressed for but he said that the VAT reduction could go unnoticed by consumers. “The reduction in VAT is a substantial stimulus in cash terms, and it has the advantage of speed; but it won’t deliver the biggest bang for the buck. Consumers will need to notice a large number of small reductions in prices, which will be lost among the special offers.”

He also cautioned that the planned increase in the higher tax rate to 45 per cent would send the wrong signals internationally and damage the City of London.

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David Frost, director-general of the British Chambers of Commerce, said: “If I were marking the Chancellor’s report card, I’d say ‘Could do better’. There are a few good announcements in there, such as deferment of the small business rate of corporation tax, allowing businesses to spread out the payment of their tax bill and the new business finance scheme. The proposal to increase national insurance contributions is wrong. At the very time when the economy should be coming out of the recession, businesses will face an extra tax on employing people.”

Stephen Alambritis, head of external affairs at the Federation of Small Businesses, also condemned the increase in national insurance contributions.

Richard Lambert, Director-General of the CBI, said: “There are a number of measures that we have asked for that will help cashflow in small businesses and business overall by reducing costs.” But he also gave warning that the move on VAT may not have the impact that is hoped. “Only time will tell whether it increases spending by individuals significantly,” he said.

Help for small business was seen as crucial by many employers’ groups as smaller companies struggle with a lack of credit. The Federation of Small Business welcomed the £7 billion package of measures that was announced. John Walker, its national policy chairman, said: “This PreBudget Report is a sign of the importance of small businesses to the UK economy. The Government’s Small Business Finance Scheme, which closely resembles the small business survival fund the federation has been calling for, will provide a vital cash boost to businesses struggling with rising costs and a lack of credit.”

The car industry, which is pressing the Government for billions of pounds in assistance, also gave a mixed reaction to the PBR. Paul Everitt, chief executive of the Society of Motor Manufacturers and Traders, said: “Any move to boost responsible spending is welcome but specific action to improve the affordability and accessibility of credit is needed if the vehicle market is really going to benefit.”

Unions largely welcomed the measures. Brendan Barber, General Secretary of the TUC, said: “The Chancellor was right to inject this extra money into the economy. He has changed the political debate by breaking the taboo that the super-rich should never pay more tax. He did about as much today as he could to boost the economy but we will need further interest rate cuts and action to get credit flowing to bear down on the recession effectively.”

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