A crucial few billion for the British economy


It looks like a storm in a Treasury tea cup: Sir Terry Burns, the department's permanent secretary, thinks a few billion pounds' worth of tax cuts in the Budget are acceptable ahead of the election; the Treasury's chief economic adviser, Alan Budd, is against any cut in taxes which is not justified on economic grounds. Both men are doing their job - and pounds 4bn or so is actually not all that much money when the usual error in forecasting the gap between government revenues and expenditure is more than pounds 10bn.

Appearances deceive, however. This is a crucial battle for the British economy.

Economists are near-unanimous that basic macro-economic policy in Britain has been better under Chancellor Kenneth Clarke than it has been for decades. He raised taxes and interest rates when it had to be done. He also to a large extent managed to depoliticise the decisions. The monthly monetary meetings were one way of doing this. On fiscal policy, Mr Clarke has repeatedly committed himself to reducing government borrowing over time, so that a failure to achieve this would be a real embarrassment.

Unfortunately, pre-election politics is coming into play. The Chancellor is under huge pressure to take cosmetic measures on the public finances that will allow tax cuts.

Already we have seen signs of political influence on interest rate judgements. Mr Clarke famously turned down the Bank of England's advice to raise base rates in May. He happened to get away with it, but he could just as easily have been wrong. As inflation rises, that possibility increases in likelihood. What will be his call on the Budget? An entirely political Budget, throwing economic caution to the winds, would seem unlikely, if only because Mr Clarke has made economic caution a political virtue in itself. But he still needs to square the circle by delivering on Tory tax cutting pledges at the time of the last election.

Even a half hearted attempt to do so, however, might make the economic pain of the recession a wasted sacrifice and throw away the policy credibility that has been built so painstakingly during the past few years. Mr Budd is right: the few billion pounds do matter.

Is the grid sale worth all the trouble?

John Major must be scratching his head and wondering why on earth the Department of Trade and Industry is so keen on floating the National Grid. So far it has brought nothing but trouble. The way things are going this most controversial of floats looks like producing more political own-goals than the defection of Alan Howarth.

The long wrangle over the sale has in itself served only to underline what a giveaway this company was in the first place. Worse still, it has focused attention on the salaries and options of the grid directors, which exploded into a row over the special dividend they will receive as a result of the flotation. The dividend was a technical device to sort out the capital gains tax problems of the regional electricity companies. It was never meant for the directors, but Tim Eggar, the Industry Minister, was brushed aside when he tried to persuade them to forgo it.

Now some of the Recs that own the grid have had the brass neck to consider a special sweetener for their directors. They want to pay at least part of the tax on the grid shares their directors will receive as a result of the flotation, a perk that cannot be justified by any stretch of the imagination.

The grid owners themselves are divided, with some wanting to sell and a significant minority - such as Hanson and the Americans, SEI - fighting to the last minute to keep their stakes. If nobody is particularly bothered about selling, and some are positively against it, why are Mr Eggar and his boss, Ian Lang, pushing ahead? Despite the controversies, there must be some political benefit from the pounds 50 a head rebate for consumers. Furthermore, the Government has encouraged the sale because it is opposed to continuing ownership of the power transmission system by the regional electricity monopolies.

On paper, that is sensible. Indeed, some in the industry claim that the regulator, Professor Stephen Littlechild, has - as a gleam in his eye - the idea of eventually demerging the regional companies' own local wire networks as separate monopoly utilities.

Even so, insistence on such a rigid separation at a time when ministers appear happy to see a pell-mell reconstruction of the industry - including approval of large-scale vertical integration through the takeover of Manweb by Scottish Power and the expansion of Eastern in the generation business - seems just a little curious. Set against the structural changes being worked by the City, ownership of the grid by the Recs is a sideshow. Mr Major may be tempted to ask his DTI ministers whether the game has really been worth the candle.

Cloud over the Pru is lifted

Having long held two fingers up to the regulators, Prudential was smartly switching its hand to a victory sign yesterday. But try as it might, the settlement of its tawdry row over pensions mis-selling with Lautro, the former life company watchdog, looks like a phyrric victory, if one at all. That it has emerged without a fine or a resounding slap on the wrist is beside the point. Finally it has been forced to concede what everyone else already knows, apart from Mick Newmarch, its former chief executive - that it had a pensions problem.

The Pru was in good company. Nearly three-quarters of the UK life industry was found by Lautro to have something to answer for on the way it persuaded people to switch from occupational pension schemes to what turned out to be inappropriate personal ones. In some cases the wrongful selling was extremely serious and heavy fines were meted out. In most, however, the matter was settled discreetly, with the insurance company agreeing to improve. But Mick Newmarch was having none of this.

He proclaimed the Pru's vest to be whiter than white, and spent a small fortune on newspaper ads to spread the message. Lautro's investigators took a different view. Not that the Pru was a big-league sinner, but it wasn't the only cherub in the life industry choir either. Mr Newmarch's obduracy turned what had become virtually a routine matter of redress into a battle of wills, against a regulatory system he despised.

His sudden departure earlier this year was partly prompted by the controversy that surrounded the manner in which he exercised his share options. But there is little doubt that another contributing factor was loss of support among the Pru's directors for his futile crusade. The succession by Peter Davis, as politically sensitive as Mr Newmarch was abrasive, paved the way for peace, and a lesson in the pitfalls of managerial hubris. With the regulatory authorities declaring formally that they intend taking no disciplinary action, a cloud has been lifted from this august institution. Once more it can look to the future.

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