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City & Business : Mr Brown must get back to breakfasts

CHANCELLOR Gordon Brown comes out of retirement this week with his first Budget. Galloping Gordon has been remarkably quiet since his initial burst of activity which gave the Bank of England operational independence and created a new regulatory framework for the City. But come Wednesday he will be back with a vengeance.

This set-piece event has been steadily upgraded. What was once little more than a vehicle to allow the Chancellor to implement his windfall tax on utilities has now been granted official mini-Budget status and in some quarters is being given the full-blown Budget treatment.

Irrespective of the tweaks Mr Brown may give to the fiscal framework, the centre piece of this Budget remains the windfall tax and the welfare- to-work programme it is designed to fund. The Chancellor is faced with problems on both fronts.

On the windfall tax itself, if Mr Brown is too ambitious with the amount he wants to raise then he will be engulfed by legal challenges. The privatised industries have chosen, incorrectly I believe, to challenge the tax not on a point of principle but on the amount of the actual charge. They are all hoping, therefore, that when Mr Brown draws the windfall lottery numbers, their company will end up at the bottom of the range.

Those companies which end up with the biggest liabilities will be honour bound to resist. BT, as we report on the front page, will not accept a charge of anything near pounds 1bn. And for some of the electricity firms, the point of no complaint will be breached at anything over pounds 50m.

The choice for Mr Brown is stark. Either he scales back quite dramatically the amount he wants to raise or face a summer, autumn and winter of discontent defending his tax against legal challenge.

The flipside of the tax is the welfare-to-work scheme it will fund. But here too doubts are creeping in. Last week's breakfast briefing with business leaders to outline the programme was being heralded by the Chancellor's coterie of spin doctors as a resounding endorsement for the principles of the scheme.

It was not. Significant doubts remain about the scheme but breakfast with Brown was not the place to air them. A number of points arise.

1) If you believe in a market economy, as the Prime Minister has suggested he does, there is a glaring inconsistency with a programme which is clearly designed to manipulate the labour market.

2) The better companies recruit only the best people. They will not be inclined to recruit from a pre-designated sector of the labour market. Nor will they want to take on staff who are surplus to requirements, and endanger their competitiveness.

3) A welfare-to-work scheme would not reduce unemployment but merely shift the jobless problem. Companies which continue to create real jobs might be tempted by subsidies to recruit from the pool of long-term unemployed but would cut back on the jobs offered, for instance, to school leavers. The problem is not being solved, merely transferred.

4) Staff recruited under a welfare-to-work scheme run the risk of being exploited by employers who see them as cheap labour.

5) There is a danger that jobs "created" under the programme will survive only as long as the subsidy.

6) Training is an integral part of the programme. However, there is a severe shortage of training capacity at colleges. A training subsidy is of no value if there is nowhere for it to be spent.

It is certainly true to say that business leaders share the Chancellor's ambition to reduce unemployment. There is less accord, however, on whether a welfare-to-work programme is the best way to do this.

Perhaps the answer is for the Chancellor to take more practical soundings from the business community on how to deal with the jobless problem. That may lead him to conclusions which require less public funding. The smaller the subsidy from the state the lower the amount he need raise from a windfall tax. The lower the windfall tax the less resistance there will be to its imposition.

Another circle squared.

Look back, not forward

TOMORROW sees the official handover of Hong Kong by the British to the Chinese. The unofficial handover took place about five years ago. To gauge, therefore, what life will be like for the colony, it is more instructive to look a little backwards than peer forwards. Certainly there are important changes for Hong Kong when it becomes a Special Administrative Region of China at midnight tomorrow. However, the Basic Law, setting out the framework for the SAR, largely calls for the maintenance of the status quo. In most aspects of commercial and financial activities it will be a question of business as usual.

That provides considerable reassurance but it is not as powerful as the fundamental reassessment of life in the territory which has taken place over the past few years. It is to Peking rather than Britain that the Hong Kong business community has been looking for guidance on how to structure its affairs over the past five years. To all intents and purposes the business community is already operating under Chinese rules and operating extremely effectively.

The Hong Kong stock market is close to all-time highs, trading links with mainland China are closer and larger than they have ever been and the territory's reputation as the financial centre of the region has never been higher.

Over half of China's foreign direct investment inflows come from Hong Kong, which also handles about half of China's foreign trade. The number of regional headquarters of overseas companies in Hong Kong has risen every year since 1992.

It will not all be plain sailing but there is a clear will and a clear necessity for China to work with rather than against Hong Kong. The bigger threat to Hong Kong prosperity comes more from itself than China. It is an expensive place to do business. In the medium term it is more likely to be priced out rather than pushed out of the market.