Clarke's difficulty with figures is worrying
Wednesday 19 June 1996
On most conventional measures, Mr Clarke's performance has indeed been a highly commendable one. But there is one area where he has fallen prey to a very human characteristic; on nearly all the important numbers he has been over-optimistic, sometimes hopelessly so. Public sector borrowing is just one. Even with the benefit of a pounds 1.1bn net contribution to the Government's finances from the sale of Railtrack, the PSBR last month came in at pounds 3.2bn. The likely overshoot for the year is now anything up to pounds 8bn, which doesn't give a Chancellor promising sound public finances much, if any room, for tax cuts.
If borrowing were the only area of concern, then that might be thought acceptable, but it is actually symptomatic of a whole series of missed forecasts. The Chancellor has been persistently over-optimistic about the scope for improvement in public spending. His growth forecast for this year looks way out of line, something which is expected to be corrected in new Treasury predictions next month that will cut the growth number from 3 per cent to perhaps as low as 2.5 per cent. Even inflation, though plainly tamed, is above target. Not so hot after all, eh?
If the Government were a publicy quoted company, it would never get away with such recklessly misleading predictions. The Treasury's persistent promises of jam tomorrow would long ago have been rattled, and its chief executive thrown overboard. But then a national economy is a rather more complex animal than even the largest of multi-national corporations. The Chancellor perhaps deserves the benefit of the doubt, even if his characteristically relaxed view of the importance of forecasts smacks a little of complacency.
In any case, Mr Clarke's ever-so-convenient difficulty with the figures is hardly unique. It should be recalled that, on average, the PSBR overshoots forecast by pounds 10bn a year. On that measure, the Chancellor isn't doing too badly. And don't forget, the Chancellor's aim is to get the budget back in balance only over "the medium term" (the Mansion House speech again). In Treasury parlance, that's five years away.
But hold on a moment. Five years is a rather longer time horizon than the Treasury was forecasting for a balanced budget at the time of its last statement in November - one year longer to be precise. It seems that once again hope is to be postponed. You don't need to be an expert on these matters to figure out why. If short-term forecasts don't matter very much, it is not going to be hard to make them justify a healthy package of tax-cutting pre-election measures. No wonder Mr Clarke was able to insist in his Mansion House speech that policy was being set on the assumption the present Government would be re-elected. Wonderful thing, the never- never.
Regulators cloud Southern battle
For the time being, the battle for Southern Water is in abeyance but it cannot be too long before the auction hots up once more with a new bid from ScottishPower. Bidding wars are nearly always bad news for the poor unfortunate that ends up with the prize. In this case, however, it is not just shareholders in the two rival bidders - Scottish and Southern Electric - that need to be concerned. Both bids involve a sizeable chunk of debt. As a consequence, regulators too are becoming highly exercised by the possibility of overpaying.
Southern Water already has a quite substantial accumulated backlog of incomplete capital spending - its underspend could be as high as pounds 300m. The last thing regulators want is an over-geared company incapable of meeting its obligations. That way the customer will ultimately end up picking up the tab. The risk of this happening with the Southern Electric bid seem to be rather higher than with the Scottish alternative. The Southern Electric bid is essentially a defensive one to keep the Scots out. Southern Electric may in these circumstances think that to overpay is the lesser of two evils. Not so the regulators, who have become increasingly concerned about the general trend towards equity cancellation, and its replacement with debt, among the utilities. It may well be they have something to say about "sky's the limit" bidding wars.
Baby Aim is a bouncing one-year-old
Today is the first anniversary of the Alternative Investment Market. With a year under its belt, it's worth conducting a short health check. Aim was set up after a long wrangle over how how tightly it should be regulated. The compromise was a market with few rules, and with the main responsibility for ensuring that companies on Aim were honest and decent given to the nominated advisers who bring them to market.
In the event, there have been almost as many new issues on Aim as companies transferring from the old Rule 4.2 market and from the unsuccessful USM, which is being phased out at the end of the year. In the 11 months to the end of May, 80 new entrants to Aim raised pounds 347m new money. Another 82 companies transferred from the 4.2 market and two from the USM.
At the start Aim was slow to produce new money for companies, but then things picked up. Some pounds 39m was raised in March, pounds 56m in April and pounds 53m in May, with market participants predicting a substantial increase this month.
This may not sound large compared with the venture capital needs of British industry. But these are mostly small companies and it is the numbers of new entrants that count - a total of 13 in May alone.
It is hard to buy a large line of shares without moving the price excessively, so larger deals are naturally taking place off market. Increasing the liquidity of the market will remain a key objective. Even so, Ivory & Sime Baronsmead, which raised pounds 44m this spring to invest in an Aim investment trust, is said to be ahead of its target of investing half the funds within three months, and the trading volume of 4.2 stocks has trebled once they moved over to Aim. On the whole then, Aim is fulfilling its purpose of providing a market, and a source of capital, for smaller companies.
The main question mark now is over how the Exchange copes with the collapses that are inevitable in a market of more than 160 small companies. Some will go to the wall because they are intrinsically risky, and if their prospectuses said so, who can complain. But others will be bad apples. The Stock Exchange will have to take a tough line with nominated advisers in such cases if the new market is to establish long-term credibility. But thus far, the babe seems to be in rude health.
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