Clarke needs to do some juggling on his tightrope

COMMENT: `Public finances are in a long-term mess and this is precisely the wrong point in the economic cycle to give another boost to consumer spending power'
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Kenneth Clarke, not a man ever likely to commit himself to the disciplines of the Lawson diet, cuts an unlikely figure as a tightrope walker. But that is his task during the next six months, up to the presumed election date. The economy could scarcely be turning out better for the Government, as yesterday's retail sales figures underlined. Consumer confidence, a key indicator of voting intentions, has returned to its highest level since 1986, in Nigel Lawson's own pre-diet days. But the usual negative consequences of a boom, whether mini or maxi, will not become apparent until after the election. Both inflation and the trade deficit are certainly likely to climb but are unlikely to reach embarrassing proportions until the next government is installed.

Mr Clarke has two problems, however. The first is the received wisdom in his party that a reduction in income tax is a political necessity. The Conservatives have promised a 20p basic rate and have to keep moving towards it. Otherwise, there is a danger that Labour's "22 tax increases since 1992" campaign will hit target. Reductions in Tuesday's Budget will also put the Opposition on the spot, for the Government will certainly challenge Labour to vote against tax cuts.

The problem is that there is not a shadow of doubt that this would also be bad economics. The public finances are in a long-term mess and this is also the wrong point in the economic cycle to give another boost to consumer spending power. With higher income growth and building society windfalls to look forward to, it would be perverse to put even more money in people's pockets.

The second difficulty is posed by the fact that we all know now what the Governor of the Bank of England thinks ought to happen to interest rates - and that he is a pretty good, if tough, judge of the Chancellor's conduct of monetary policy. In the days before the publication of minutes of their meetings, a Chancellor hoping to postpone a difficult decision to a more convenient date would have been able to do so. Mr Clarke will face strong and public pressure from the Bank to raise base rates again within the next month or two, unless he delivers a particularly tough Budget. The Bank will spell out that if he does not agree, it will mark the death of the Government's own inflation target. This is not what somebody who has made a virtue of ostentatious economic prudence wants said about him.

Can the Chancellor stay on the tightrope? The prudent thing would be a fiscally neutral Budget on Tuesday. He might then get away with doing nothing on interest rates too, coasting to the election on the strength of the economy. There is another alternative, though not a particularly honest one. This would be a Budget giveaway which stayed just about within the bounds of credibility but which the Chancellor has no real intention of putting into practice. It is easily forgotten that most of the measures to be announced will not take effect until April, a month before the election. It would not be hard to find excuses for reversing the process immediately afterwards.

But perhaps the most compelling option is the rolling programme, the promise of jam tomorrow, the hope-postponed type of Budget. This allows the Chancellor to do little for the time being but promise much in future, conditions allowing of course. It's hard to teach a politician new tricks.

Steering clear of the auction room

Some of our best-known investment banks appear to be refusing to join the move towards cheaper underwriting commissions for rights issues. It might be just caution, or a reasoned commercial decision on the part of BZW, SBC Warburg and most of the big US houses not to join a price war. But a much deeper argument seems to be going on behind the scenes.

Kleinwort Benson yesterday launched another rights issue incorporating a partial auction of the sub-underwriting, a pounds 45m fund raising for Biocompatibles. With two pioneering issues by Schroders earlier this month this brings the grand total of the new auctions to five. But so far, nobody other than Schroders and Kleinwort - with Merrill Lynch coming in jointly on Biocompatibles - seems willing to come into the auction room.

There was no auction in the SBC Warburg rights issue for Azlan on Tuesday. BZW too has made polite noises about encouraging flexibility, but in its handling of a couple of recent share issues, including the Invesco rights, it has stuck to fixed commissions. Some institutions even suspect a deliberate attempt to undermine the move to new flexible commission rates.

You don't have to look far for motive in all this. Institutional enthusiasm for innovation - even though it costs them money in lower commissions - stems from the belief that there is a serious risk of the OFT and MMC delving into the whole question of capital-raising, thus whittling away shareholders' pre-emption rights, a closely related issue. And who in the City wants to see pre-emption rights eroded, replacing rights issues with US-style bought deals? Why, none other than some of the big integrated investment banks that have failed to come into the auction room.

Darwin's theory of evolution

Here's an odd one. A company which hardly anyone knows anything about, except that it's in biotechnology and eats money, buys a company even fewer people know anything about except that it's much the same - a loss making biotech hopeful. Fortunately it has Bill Gates as a shareholder so the shares move briskly ahead. That, in a nutshell, summarises reaction in the City yesterday to the acquisition by Chiroscience of Darwin Molecular.

Darwin has come along just as investors were groping their way to an understanding of chiral chemistry, the way in which Chiroscience chemically purifies existing drugs to reduce their side effects. By comparison, the activities of the US group rank as science fiction. The company searches for genes to discover why people are prone to certain diseases and boils down huge volumes of data using huge computers to uncover new targets for drugs.

What it's actually worth is anyone's guess. Chiroscience thinks $120m, more than doubling the $55m Mr Gates and his pals in the venture capital industry have pumped into the company over the past two years. But then in stock market terms this seems more a case of backing the man irrespective of the company and when good old Bill's there with a ready quote, it hardly matters. "The deal is the right move for both of them," he enthuses. So that's all right then.

A word of warning, however. Mr Gates may be the most talented entrepreneur of his generation, but he's also someone with a multi-billion dollar fortune to burn. Just because Mr Gates has chosen to bet his money on a company with about as much to do with the theory of natural selection as a bag of jelly beans does not mean Chiroscience is on to a winner.

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