The pre-Budget report on Tuesday is Alistair Darling's first since he took over from Gordon Brown, his neighbour in Downing Street. Unfortuantely for the new Chancellor, he will not have much room to manoeuvre. Falling tax receipts and continued high levels of public spending mean that he will be forced to adopt a steady as it goes approach. Expect a few tweaks on taxation and a couple of grand-sounding popular measures that probably won't add up to much, but little else.
The bottom line is that public borrowing is still too high for comfort and Gordon Brown's fabled Golden Rule will have to be fudged yet again to make spending seem more prudent than it actually is.
One interesting question will be whether Mr Darling proposes anything to close the loophole that allows non-domiciled UK residents to pay little or no tax. Many of Labour's billionaire backers do not even have a nodding acquaintance with HM Treasury when it comes to paying anything into the public coffers. Despite Mr Brown's promise to make sure they pay their dues, no legislative action has ever been taken. Will Mr Darling show any more spine than his predecessor? Somehow, with an election possibly round the corner, I doubt it.
Another issue that the Chancellor may address is the rules that allow private equity bosses to avoid paying hundreds of millions of pounds in capital gains tax following debt-laden acquisitions. Will the need to raise more taxes outweigh the craven desire to keep the City onside?
Hopefully, there will be a simplification of taxes on business and further measures to encourage research and development. Expect a renewed focus on green taxes in a bid to recapture the environmental vote from the Conservatives – a carrot and stick approach – to alter consumer and business behaviour.
No wriggle room
So what will it all amount to when the dust settles? Well, not a huge amount. The comprehensive spending review, also due to be published on Tuesday has been set in stone for a while, so Mr Darling has little wriggle room for significant taxation changes or changes in spending priorities. He has already indicated that the credit crunch will hit UK growth over the next year. This represents the largest bump in the economic road since Labour came to power and an issue larger than any Mr Brown had to contend with during his time as Chancellor. The behaviour of global markets is something out of Government control, and it's a handy excuse when Mr Darling explains why the Golden Rule will have to be amended again.
Can Barclays still big it up?
So the inevitable came to pass last week. Barclays formally conceded defeat to RBS in the battle to acquire ABN Amro, the Dutch banking giant. The Barcalys board now has to convince investors that it has a big future being small (in international terms) rather than a big future being big. But the bank now looks vulnerable to giant foreign raiders. Despite having a market capitalisation of £44bn, Barclays is firmly in the second tier of the global banking sector. It would make a tasty target for the likes of Bank of America or Citigroup. The RBS takeover of ABN, should it complete as scheduled, is to my mind the first play in the next round of consolidation in the banking industry. Northern Rock is obviously going to get snapped up, and given the vast profits generated by UK banks, it is not hard to see Barclays and maybe one or two others going the same way.
Banking tends to be a cyclical industry, and with the current turmoil in world markets, Sir Fred Goodwin at RBS is a brave man to be buying ABN. The Edinburgh-based bank is a legendary cost cutter – it made a roaring success of the takeover of NatWest – and its management team could repeat the feat with ABN. But Sir Fred had better be on his toes. Activist investors led by Knighte Vinke Asset Management have got their claws in to HSBC. They may turn their attentions to RBS should any shortcomings arise from the ABN deal – not least because RBS has always had a fairly disdainful view of its shareholders. Sir Fred's burning ambition to create a global financial powerhouse is admirable and it's a pity a few more British CEO's don't share his drive. However, one wrong step and the balance of City opinion may swing quickly against him.
The question that has to be asked is whether Sir Fred would hypothetically have made the same offer for ABN today, in light of the recent global credit crunch. If the answer is no, you have to wonder exactly how much ego was involved in his commitment to drive through his takeover plan. John Varley, the chief executive of Barclays, is probably sitting at home this weekend, licking his wounds, while north of the border, Sir Fred, is triumphant once more. Let us see just how pleased he is with himself in 12 months time.Reuse content