Tax reform could boost investment, says Vince Cable

• Business Secretary Vince Cable

He revealed yesterday that shifting the emphasis of tax relief from debt to equity is among a number of options now under examination.

Cable told a Sunday newspaper that Britain's economic recovery is at risk of being undermined by the lack of bank lending to businesses.

The recovery had been sluggish since Britain exited recession in the last quarter of 2009 and he said he was constantly hearing that small firms were struggling to raise finance from the banks.

"We could have a second credit crunch if we don't get credit flowing," Cable said.

"It's what I hear most from the businessmen and women I speak to, that the flow of credit and lending to business is still weak.

"Demand is already depressed, and the danger is that the lack of lending could depress it still further."

The UK government is working on new measures to get credit flowing and a green paper on business finance will be published in the next two weeks, Cable said, but it must also find ways to redress the bias towards taking on debt and try to get more equity funding into business.

"We are still identifying new measures, but it's important because the effects of quantitative easing will soon be wearing off," he said.

Britain needs to rebalance its economy, boosting high-tech manufacturing industry and reducing its reliance on the financial sector, Cable said.

But simply pumping more money into the economy in an effort to artificially get it moving again would risk encouraging another housing bubble and would "only lead to another disaster", he said.

"What we are doing is tricky; we must encourage growth and rebalance the economy in a healthy way and geographically. It's going to be a difficult trick to pull off."

Cable's comments on finding new forms of financing companies follow similar calls from leading figures for a reform of the tax system away from a debt-driven culture to one that supports equity investment.

Xavier Rolet, chief executive of the London Stock Exchange, told Scotland on Sunday last year that tax incentives to encourage equity investors, including tax-free zones, would help create new businesses and jobs.

While debt receives tax relief, equity investors are taxed at a number of stages, he said.

He called for restrictions to be lifted on venture capital trusts, encouraging more investment and allowing them to trade in the secondary market.

Douglas Ferrans, chairman of the Investment Management Association, is among those in favour of adopting selective tax relief as a stimulus for economic growth.