Asda's gain is the Conservative Party's loss
Tuesday 17 October 1995
The free-market argument for abolishing the exemption centres on price. Asda says we pay too much for basic medicines. The profit margins on toiletries, for example, is around 50 per cent higher than those on food items. The argument for maintaining some kind of price fixing centres on choice and ease of access to a local pharmacy - pretty similar to the arguments in favour of the Net Book Agreement.
If the OTC exemption disappeared, the supermarkets would cut prices, forcing small, independent pharmacies out of business, or so the argument goes. There is also an extra element in this debate that was absent from that over the Net Book Agreement. The Government's free market principles should place it philosophically on the side of deregulation, but its actual policies may put it on the other side of the fence. Its determination to shift the provision of medication out of hospitals and towards local GPs -while at the same time moving more drugs off prescription to make them available over the counter - would argue strongly in favour of preserving the present set-up.
What is clear is Archie Norman is playing a shrewd hand. After his successful challenge to the Net Book Agreement, this is another public relations triumph that helps establish Asda as people's champion and a low-cost alternative to rivals Sainsbury and Tesco. From a shipwreck only three years ago, when few could see a future for this also-ran of the sector, Asda seems to be establishing a quite distinct place for itself in the market. Fortunately for Asda's shareholders, Mr Norman's appetite for sinking ships is a limited one. Persistent speculation over his political ambitions have recently been quashed. Asda's gain is the Conservative Party's loss.
Latest sad scene in the Cedric saga
Poor Cedric Brown. He just can't seem to get it right. Having accepted a 73 per cent pay increase, he has now publicly donned the hair shirt to atone for it, by refusing to join the board's long-term incentive bonus scheme. Both decisions are equally idiotic. The justification for long- term schemes, as companies never tire of telling their shareholders, is to motivate management to deliver top performance. Possibly Mr Brown thinks that theory is tosh, and basic salary is more than enough by way of incentive. If so, you have to wonder why the company is continuing at all with a bonus scheme that will benefit 250 others.
More likely, this is another badly written scene in the painfully slow tragi-comedy of Mr Brown's downfall. The original pay rise, justified as replacing an old and poorly structured bonus scheme, has already undermined Mr Brown's authority inside and outside the company. With the departure, announced yesterday, of his longest serving executive colleagues, he has become an isolated figure on the board, the last of the executives who grew up with the company.
Chief executive he may still be, but power is slipping away. Increasingly that power now resides with Richard Giordano, the chairman. His critical views of some of the policy decisions taken before he arrived, particularly of refusal to contemplate demerging the public gas supply business, is well known.
As the share price has been indicating for some time, British Gas is in a hole. The company is being progressively squeezed by the introduction of competition, which has knocked its share of the industrial users' market for six at a time when selling prices are falling and high price North Sea production contracts are eating a hole in its balance sheet. Next year, competition begins experimentally in the domestic market, and who knows what that may lead to.
The company's safe and lucrative monopoly business is the transmission grid, but the terms under which it runs the grid are under attack from the regulator, Clare Spottiswoode. Mr Giordano is wrestling with a serious problem. The public perception of British Gas is that it is a profiteering monopoly run by overpaid executives. The commercial reality of the profits outlook, as the City has been aware since well before the salary scandal broke, is exactly the opposite.
An advance order for smoke and mirrors
The Conservatives have danced away at least six of the seven veils in their heavy hints of tax cuts to come in the November Budget. The result in the short run at least is that the markets will be casting an even beadier eye on the public sector borrowing requirement for September.
The first five months of the year has brought little but disappointment on the deficit. If the City's forecast of around pounds 4bn for September is proved right, that will add a further month in which there was no improvement. The underlying position - excluding privatisation receipts - is showing some modest decline, at pounds 300m a month. The implication would be a PSBR not far short of last year's eventual deficit of pounds 36bn.
Last week's "Green Budget" from the Institute for Fiscal Studies and Goldman Sachs projected a more optimistic outcome of pounds 27bn, but even that is still considerably worse than the pounds 21.5bn foreseen by the Treasury at the time of the last Budget. The shortfall has arisen principally on the revenue side. Receipts are lower, says the "Green Budget", because both inflation and growth are lower than expected.
Despite this, the "Green Budget" said modest tax cuts of pounds 2-3bn next year were compatible with a PSBR of pounds 17bn for 1996-97, which is not far short of the Government's objective of pounds 13bn last November. However, that is based on the notion that there will be a decline in real public spending in 1996-97. This, however, is a pre-election or election year. Traditionally, Chancellors loosen the purse strings in such years. To tighten them might seem like political madness.
Scepticism about such a scenario is widespread in the City, as is the notion that Kenneth Clarke will in practice yank this year's PSBR back into shape by not allocating to spending departments the contingency reserve of pounds 3bn. It hardly makes for a propitious background for a tax-cutting Budget, but one is coming for sure. No doubt the Treasury is already putting in an advance order for smoke and mirrors.
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