By Max Clarke

VAT should be cut in key sectors, the Federation of Small Business, whose quarterly business confidence index plummeted to just 0.3 from 6.7 in the first quarter 2011, have recommended in their latest Business Confidence Report.

Construction, which contracted by up to 4% over Q1 2011 threatening thousands of businesses, would particularly benefit from a targeted 5% reduction in the VAT rate.

"Consumer demand is a key barrier to economic growth so such a cut would encourage people to spend in these areas," the FSB were quoted in a statement on the BBC.

The UK’s tourism industry should also have VAT rates sliced, after the FSB index dropped to -4 from 13. Recent figures published by the Office for National Statistics, however, indicate the industry has returned to growth after decline was then followed by contraction.

“The UK economy is still in a fragile state and these figures clearly show that the government's growth strategy is just not working,” said the FSB’s John Walker.

"In an economy characterised by high unemployment and muted demand, more needs to be done to encourage businesses to take on staff and grow their business so that the recovery can really get back on track."

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