COMMENT: More sleight of hand with the nuclear figures
"For the Government, this is an easy to win situation. If the decision to reduce the overall cost estimates by £2.2bn proves wrong, the taxpayers who pick up the pieces may not yet be old enough to vote."
Wednesday 10 May 1995
If the Department of Trade and Industry and the Treasury had not found those savings, then most of the £2.5bn to £3bn proceeds of selling the nuclear companies would have been gobbled up by the long-term liabilities of the Magnox stations. Like everything else in the nuclear industry, this is not a simple story. Because the Government is keeping the Magnox stations, it has to find the £9.8bn that the two nuclear companies have provided in their 1994-95 accounts for fuel reprocessing, waste treatment and station decommissioning. Of that sum, £4.9bn can be found from income from future sales of Magnox electricity, cash in the companies' balance sheets, the remaining income from the nuclear levy and a previously agreed change of strategy to reduce fuel decommissioning costs. A further £2.6bn is chalked in for the privatisation proceeds. Where does the other £2.3bn come from?
Trick number One (done with mirrors, this one): according to a two page release from the DTI, which is not a part of the white paper itself, the Government considers these liabilities to come to a grand total of £8.5bn, or £1.3bn less than the companies themselves are about to reveal in their annual reports.
How so? The answer is buried in a footnote. The companies have calculated their liability figuresusing what the DTI calls a "conventional and prudent" discount rate of 2 per cent a year.This reflects the fact that the money will not be paid out for a number of years - the last chunk perhaps a century ahead - and therefore interest will be earned (measured in real terms after allowing for inflation). Instead the government has decided to use a discount rate of 3.5 per cent for the first 25 years, returning to 2 per cent afterwards. Effect: the present value of the Magnox liabilities are reduced by £1.3bn.
The other unexpected saving is rather more straightforward (simply sleight of hand). The white paper predicts that total liability for the Magnox reactors can be cut by 10 per cent, or £900m. This is apparently based on recent trends in the costs of reprocessing and decommissioning which allow forecasts of the bill to be trimmed. For the government, this is an easy to win situation. If the decision to reduce the overall cost estimates by £2.2bn proves wrong, the taxpayers who pick up the pieces may not yet be old enough to vote.
When is a crisis
not a crisis?
Is this a sterling crisis? With no formal exchange rate target it is hard to answer the question with a definitive yes, but even so a fall of one per cent in the pound's value on two successive trading days is pretty grim and it looks as if it will get worse. The currency markets' verdict on the Chancellor's decision last Friday not to increase base rates is harsh though fair enough in the circumstances. The markets had thought the system was set up to allow tough decisions, even though the Chancellor always has the last say. Not so. Mr Clarke has fallen at the first hurdle in refusing to agree to a widely-expected increase in base rates.
The decision might have been reasonable; there is some evidence that the economy is slowing alongside signs of inflationary danger. But the fact that it was also politically expedient has dealt a severe blow to the credibility of monetary policy. Who can believe the decision would have been the same had the Government been riding high in the polls?
The figure for retail price inflation in April, to be announced on Thursday, is likely to be an improvement on the previous month. Good news then? Not quite. The trouble is that the Bank of England, to retain its own credibility, will have to publish a higher forecast for inflation in its quarterly report the same day. In February's inflation report the Bank said the risk was that inflation would turn out higher. With policy unchanged, the pound weaker and more evidence of strength in manufacturing, that risk has been confirmed.
Last quarter the Bank predicted that on current policy, inflation (excluding mortgage payments) could return to 2.5 per cent by 1997 - where it would happily coincide with the government's effective target, the top of the bottom half of the 1-4 per cent range. If the Bank's economists stick to that prediction they will be alone.
Mr Clarke is now almost as badly hemmed in as Norman Lamont was shortly before Britain's retreat from the ERM. His ability to raise interest rates before his 7 June meeting with Mr George is severely restricted. Apart from the fact that he announced last week he would not, it would look like a panic reaction to sterling's nosedive. If he had acted last week he might just about have got away with a quarter point rise. By next month it will have to be the full half point, or the present assault on sterling will look like a vicar's tea party. Either way the benefit of any rise in rates for the currency will be lost. Voters can add dearer foreign holidays to their feel-bad list.
It is easy to understand why Mr Clarke feels chagrined that he is getting no credit in the markets for the strong economy, balanced growth and low inflation. It is, however, his own fault for selling the markets an unrealistic inflation target. Inflation below 3.5 per cent throughout a full economic cycle would be a victory against history. Even in the golden age of the 1950s and 60s retail price inflation was 4-5 per cent at the top of the cycle. Such a demanding target should perhaps never have been set; if unprepared to take the necessary hard decisions, that is doubly the case. Mr Clarke has made that old mistake of saying one thing and doing another. The range of the government's current target is too small for even the most modest cycle, and the level is ambitious. Failure to stick to it will prove costly. Mr Clarke and Mr George have also been wrong to shrug off the pound's fall as a ''wobble''. The exchange rate is only one of a range of relevant inflation indicators, but the inflationary impulse in Britain has almost always been imported. It is hard to blame the markets for suspecting that nothing much has changed in British economic policy after all. If the government has decided on a cut and run policy before the election in 1997, investors would appear quite justified in taking the same approach with the pound.
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