Comment: Credibility question looms for monetary union

Click to follow
The Independent Online
For those who believe the beef crisis nothing less than a Continental conspiracy to punish Britain for its Euro-sceptic tendencies, here's another wonderful piece of apparent victimisation to add grist to the mill. Thanks to a skillful feat of economic forecasting, the European Commission has predicted that the French and German governments will get their deficits below 3 per cent of GDP next year while the UK will be above the Maastricht limit with 3.7 per cent. But although this may look like another case of EC Brit-bashing, it is actually more subtle than that.

The forecasters seemed to be accepting reality as far as Britain is concerned while ignoring it for the two main Continental powers. Clearly it is better for the Commission to strain our credibility than to rock the boat by saying that a dismal growth outlook means France and Germany will fail to qualify for the single currency either.

To reach the conclusions it has, the Commission appears to have done little more than accept French and German assurances that borrowing will be below the 3 per cent ceiling, whatever it takes. This, of course, is not a forecast, but a statement of intent. On the other hand, the Commission has rightly taken with a pinch of salt the official UK prediction that it can get borrowing on a path towards 2 per cent of GDP with a general election looming. At best we have an inconsistency of approach. The less charitable view is that the forecasts have been deliberately stretched to reach the right political conclusions. Along the way the Commission has also highlighted some of the pitfalls of the single currency timetable. One is obvious. The Governor of the Bank of England - by no means a bleeding- heart Keynesian - has recently expressed concern that the bid to cut government deficits in the sprint for the finish could send the Continental economies into a spiral of slower growth and even bigger deficits.

Another is the vexing question of where these budget cuts will be made. It is probably right not to admit yet that the 1999 start date will require either extraordinarily painful budget cuts or Euro-fudge on a massive scale to allow enough countries to qualify for the single currency. To do so too early would reduce the momentum that many countries need to bring down excessive government borrowing and restructure expensive social security systems. But the admission will have to be made sooner or later. If it is left too late the project of monetary union will be destroyed by its lack of credibility.

Time running out for power shareholders

There ain't much danger of British Gas-style shareholder expropriation - if that is indeed what the regulator's new pricing proposals add up to - in the electricity industry, not for the present generation of investors anyway. Scarcely a week seems to pass without news of some massive new electricity share buy-back or takeover bid. The way things are going, the industry will soon have repaid its entire capital - which for the five to six years it has been in the private sector is not bad going. With the benefit of hindsight it is clear that both the regional electricity and power generation companies could have been privatisated with much higher levels of debt.

PowerGen's buy-back proposals announced yesterday will bring to nearly 20 per cent the amount of capital this particular company has brought back since privatisation, all of it at considerably higher prices than the knock-down level at which it was sold. On top of that, investors will have received 65p a share in dividends taking into account the present year's bumper payout. For the present generation of shareholders at least, electricity is proving a fabulous investment. But if gas and BT are anything to go by, it will not always be so. Clare Spottiswoode-type regulation - possibly in person as well as tone (for it is hard to see the present incumbent, Professor Stephen Littlechild, surviving a change of government) - is only a matter of time.

The message for investors is to get out while the going is so good. Which is precisely what the big tax-exempt funds will be doing the moment PowerGen launches its buy-back, taking in a handy 20 per cent tax credit along the way. PowerGen insists that the buy-back net will be spread as widely as possible, but there seems not much doubt that most Sids will be left out of the action. They will probably also still be there, naively believing this is a nest egg they can safely tuck away and forget about, when the regulatory screw begins to tighten viciously around this industry in a few years' time. All those arguments about the earnings-enhancing power of share buy-backs, their ability to deliver a more efficient capital base etc, no doubt have their meaning and place, but the fact of the matter is that the special dividend payment, paid to all, is still by far the most equitable way of paying back capital.

A whole new world of social security risk

It is hard to picture Peter Lilley queueing up at the local post office to claim his state pension using one of the blue-and-gold smart cards he was proudly holding aloft yesterday as the Government trumpeted its latest drive to eradicate social security fraud.

It is also difficult to imagine that ICL and the other private sector partners in this particular venture will find it quite the little money- spinner that the headline figures suggest.

The Post Office Counters Automation Project, as it is known, is the latest example of what can be done under the private finance initiative. This is a wheeze for transferring risk from the public to the private sector at the same time as transferring a good deal of government costs from the pot marked capital expenditure today to the one marked current expenditure tomorrow.

The actual capital sum involved in buying the hardware, installing it and then training subpostmasters in using it is only about pounds 200m. But in order to make the project look like another big leap forward for the PFI the figure of pounds 1bn was conjured out of the hat. This is the total revenue that could accrue to ICL and its partners over the eight-year contract concession.

That could prove a tall order. It depends on people not deserting the Post Office in droves and having payments such as child benefit and pensions paid direct into their bank accounts. It also depends on the smart-card technology attracting a whole range of other revenue from the payment of television licences to utility bills.

It also depends on unscrupulous claimants not finding a way to cheat the system - since all such fraud risk will be down to the operators.

Finally it depends on the technology working to specification and on time. In this respect the pounds 100m project to overhaul the National Insurance computer system is far from heartening - the project is already months behind schedule, resulting in pounds 12m in penalty payments so far.

That, we are told, however, is what the PFI is all about - risk transferral.

Comments