Comment: Conjuring trick leaves a tax cut on the cards
Wednesday 10 July 1996
The Maastricht trick relies on the fact that the deficit that counts for membership of the single currency is a slightly different definition to the PSBR. It excludes privatisation proceeds but includes a variety of other transactions such as debt write-offs for public corporations and cash-flow delays. The upshot is that though it has been higher than the PSBR for the past 15 years, it will be lower in 1997/98. Nothing suspicious in this, the Treasury insists, just a fact of life. Jolly handy one, though.
But enough of Maastricht. Europe is boring. What we really want to know is whether the condition of the Government's finances allows Kenneth Clarke to deliver tax cuts. Borrowing may well turn out to be even higher than the Chancellor's new forecasts. This would firmly close the door on any tax cutting if the Chancellor is serious about getting the budget to balance by the end of the century.
On the other hand, given that the Treasury prediction for the PSBR this year and next is now similar to what independent economists expect, Mr Clarke may be able to get away with what he did in the last Budget. It may be possible to find pounds 2-3bn for lower taxes by trimming expenditure a bit here and cutting the contingency reserve there without entirely sacrificing his credibility as a Chancellor who is tough on borrowing. His claim that borrowing is on a downward path will still be true, as will his forecast of a balanced budget in the medium term. As at the time of the last budget, however, the "medium term" becomes a year later.
The chances are that the information available about revenues and spending by November will leave the latter option open to Mr Clarke. But if he is sincere about the need to reduce borrowing, he will avoid the temptation. The tax increases announced by his predecessor Norman Lamont looked for a while as though they had helped close the "structural" budget deficit, the bit that economic growth could not whittle away. Unfortunately the Lamont medicine has worn off.
Slow growth in tax revenues due to changes in the economy ranging from corporate avoidance to the new "flexibility" of the labour market have reopened the structural gap. If Mr Clarke entertains serious hopes of still being Chancellor after the election, he should be trying to solve the borrowing problem the next Government will inherit. All the same, the fact that the summer forecast gives him room for a minor tax cutting Budget if the politics require it must be something of a comfort.
Let the MMC settle the gas pipeline battle
With two weeks to go before Clare Spottiswoode publishes her final, final, yes, she really means it this time, FINAL, proposals for price regulation of British Gas's pipeline business (TransCo), there's no sign whatsoever of either side budging from the entrenched positions they have taken up. More than a month of screaming, shouting, lobbying and manipulating by British Gas has failed to persuade the regulator to alter her proposals one jot. As far as the regulator is concerned, the point about depreciation is non negotiable; either TransCo accepts this downgrading of the amount of depreciation it is allowed to take out of charges or the whole thing goes to the Monopolies and Mergers Commission. The lady is not for turning, and no amount of pressure or lobbying will persuade her.
As for the other half of this review - tough new efficiency targets and a 7.5 per cent rate-of-return assumption - there doesn't seem to be much room for manoeuvre there either. The regulator's view is that these are perfectly reasonable assumptions and there's not a snowball in Hades chance of the MMC being persuaded otherwise. Sulking miserably in the corner, TransCo retorts that it has not yet been allowed to see the Coopers & Lybrand and WS Atkins reports on which the assumptions are based. I'll publish them then, says Clare Spottiswoode. Er ... hold on, says British Gas, we didn't say publish. There's a lot of commercially confidential information in those reports and we don't want every Tom Dick and Harry gaining access to it, do we?
Why not, says Ms Spottiswoode. Everyone complains about lack of transparency in utility regulation so let's publish and be damned. And so the debate, or rather slanging match, goes on, and on, and on. The sooner the MMC is assigned to the case the better for everyone. The MMC might itself be a somewhat discredited organisation these days. But anything seems better than this. If the regulator is indeed shown to have got it fundamentally wrong, then the already strong case for root and branch reform of our regulatory system becomes overwelming.
BAe must give a little over Airbus
It may have taken the four partners in Airbus and their sponsor governments a decade to agree to turn the consortium into a single corporate entity but in retrospect that will probably come to be seen as the easy bit of the exercise. The hard part begins now and, if past experience is any guide, Airbus will need all of the three years it has given itself and more to emerge as a fully fledged commercial operation with its own assets and equity.
The most difficult issue is the respective valuations of the assets being contributed by British Aerospace, which has a 20 per cent stake, and the French and Germans, who each hold 38 per cent. BAe has a good case for arguing that its assets entitle it to more than 20 per cent of the equity since its Airbus division, unlike those of the French or Germans, is profitable and efficient. BAe has also gone further than its Continental partners in subcontracting out its work-share.
Since BAe does not appear to want to increase its share of the equity, that would mean the other Airbus partners compensating it for the value of the assets it will contribute. BAe's shareholders would rightly castigate the management if it sold them short, but at the same time they need to look to the extra profit that will accrue if Airbus is placed on a truly competitive and commercial footing.
If the French can cede the principle that 38 per cent of each Airbus that rolls off the assembly line in Toulouse must be made in France, then BAe can afford to give a little as well. There is a bigger prize to be had - the prospect of a fully fledged European competitor to Boeing - which dictates that national considerations be put aside.
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