A Budget with the smell of bad eggs

City & Business
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As I watched Gordon Brown deliver his first Budget last Wednesday I was struggling to work out who he was modelling himself on. Was it Gordon The Blue Engine who pulls the express and works alongside Thomas The Tank Engine? Or was it Flash Gordon - fictional saviour of the universe? Gordon is a very pompous engine prone to bouts of self-importance, while Flash is generally a good bloke righting wrongs and making the world a safer and better place to live in. I suppose, therefore, the Chancellor was mixing and matching his role models.

There was little doubt that Mr Brown was extremely magisterial as he salvaged our schools, rescued the health service, put Britain back to work, ended house price volatility and restored some order to the public finances. But all this was underpinned by just a hint of arrogance as he plundered pension funds and the corporate sector. There seemed to be no recognition that when it comes to taxation somebody has to pay. Mr Brown would have had to raise income tax by around 8p to generate the revenue coming from the windfall tax and the abolition of tax credits.

Clearly the Chancellor is constrained by election pledges, but had he opted for an 8p tax rise there would have been more contrition than was demonstrated during Wednesday's pounds 10bn revenue-raising exercise. As our analysis on page one suggests, that bill will be paid not by faceless corporations and pension funds but by individual shareholders, pensioners and employees.

Already privatised companies are thinking about restricting their dividends to fund the windfall tax. Some will shrink their cost base, putting jobs at risk. Big employers are faced with a bill approaching pounds 5bn to make good the shortfall in pension funds created by the abolition on tax credits. That shortfall will have to be made good by cost-cutting elsewhere. The Budget has sent fund managers scurrying to reassess their portfolios now that the yield on UK equities has been ravaged. That is likely to bring a widespread, sustained sell-off of the London market.

The impact of this Budget will be hidden and long-lasting. Companies could take 10 years to top up pension funds. Rebalancing investment portfolios could be spread over a year. The windfall tax is being paid over two years, but it may take another year before the compensating cost cuts are implemented.

Like a bad odour, the impact of this Budget will linger for a long time. Like a bad odour, you may not be able to quite work out what the impact is - but you will certainly know it is there.

Call to arms

GEORGE SIMPSON, GEC's chief executive, faces his first real test since he took the job last September, when he presents the group's annual results this week. Much was expected from Mr Simpson when he took over from Lord Weinstock, but so far he has rewarded investors with a disappointing performance. The share price is barely changed from the day he joined.

The market is right to reserve judgement, but it will want to glean some idea of where Mr Simpson wants to take GEC. He has promised a wide-ranging review, with the prospect of fringe disposals. The key question, though, is what he plans to do with the defence business. There is much chatter about an acquisition of British Aerospace as a means of exhausting GEC's cash pile and creating an integrated national defence business.

That is simple, but a straightforward acquisition is inappropriate. A better way forward is to create a new company into which are folded the defence interests of GEC and BAe, who would become the main shareholders. This allows both companies to maintain an interest in the sector without the baggage of being a defence contractor. There would be no clash of egos, since the new company would have its own identity.

Most importantly, however, it would create the right structure to participate in the long-overdue consolidation of the European defence industry. It is clear that partnerships rather than takeovers are the right way to promote that consolidation. A vehicle which can accommodate the injection of other European defence contractors in return for a stake in the business would have great appeal to those who see the benefit of a joint European effort to compete with the Americans but still worry about national sovereignty.

Both GEC and BAe have demonstrated their willingness to participate in consolidation, but without success. A more creative solution is demanded. If Mr Simpson can provide the catalyst he will begin to unlock the value vested in GEC.

Ayling image

CHATTING casually with a number of notables last week our conversation turned to Bob Ayling, chief executive of British Airways. I was surprised to discover how little popular support he seemed to have with what you might have expected to be his natural constituency. The common view was that his failure yet to deliver the alliance with American Airlines and his high profile confrontation with the unions have left him with a credibility problem.

I think that judgement is a little harsh. The deal with American would be such a coup for BA that it was always bound to generate a lot of controversy. With so many conflicting views in circulation it is not surprising that the regulatory wheels have turned slower than Mr Ayling would have liked. And with the whole process put on hold because of the election and held up again because of the change of government the BA chief has not been blessed with good fortune.

It is true that BA's battle with the unions seems entirely inappropriate, given the spirit of the New Labour government, but the confrontation is an unfortunate function of timing rather than an Ayling-inspired showdown.

If the dispute can be settled and BA can demonstrate some tangible progress on the American deal, Mr Ayling will soon win back the support of his foul weather detractors.