Damian Reece's Outlook: Brown has punctured his political reputation, but he has damaged the economy even more

The naked truth of Britain's real economic malaise has been laid bare, and with it the appearance of Gordon Brown's political invincibility
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The Independent Online

Mr Brown and his Treasury spin doctors have started to pave the way for a deeply embarrassing admission that his expected 3 to 3.5 per cent growth rate for the UK economy is wrong. It is going to have to be reduced, and reduced a lot, judging by the noises coming out of Washington.

Mr Brown's admission is the political equivalent of a very large corporate profits warning. The warning is all the more shocking because it comes from a Treasury management team, led by Mr Brown, that for the past eight years has slapped down anyone brave enough to question its governance of the economy with a battery of facts and figures about unprecedented economic stability and well-being. Indeed, when it comes to forecasting, no one gets it right like Mr Brown, according to the Treasury.

The growth rate is the assumption on which all Mr Brown's most important economic policies are based. Cutting it, to about 2-2.5 per cent, will immediately raise the very real prospect of either big cuts in public spending, to the tune of £10bn a year, or an increase in tax equivalent to 3p on the basic rate of income tax. Thank goodness the election was in May, Tony Blair will no doubt be thinking as he peruses this morning's headlines.

If Mr Brown himself admits the economy isn't going to grow at anything like the rate he has been insisting on for more than two years, then all those terrible predictions and calculations of fiscal black holes are about to come true. Mr Brown's political enemies, in all three major parties, will be clapping their hands with glee. For them, the emperor has been exposed at last. The naked truth of Britain's real economic malaise has been laid bare, and with it the appearance of Mr Brown's political invincibility.

Revenge will be sweetest, however, for Rodrigo Rato, the managing director of the IMF who has long suffered Mr Brown's haughty put-downs. Six months ago, the pair shared a platform shortly after the IMF had cut its UK growth forecast to 2.6 per cent. Mr Brown said Mr Rato's staff had got their figures wrong in the past and were wrong again. This week the IMF cut again to 1.9 per cent, but this time Mr Brown has been forced to follow suit. Humiliation rarely comes as complete as that. Mr Brown will blame the oil price for the UK's economic woes. But this is poppycock. Sure, the oil price doesn't help but it will simply further damage an economic system already exposed by too much personal and public sector debt.

The damage to Mr Brown's political credibility over his climbdown on growth rates is significant, but sadly for the rest of us the damage to the economy will be much greater. Labour's poor record on rising levels of taxation, for higher income groups in particular, is about to get worse.

Higher prices will curb binge drinking

Enterprise Inns is Britain's biggest pub company. Having floated 10 years ago with a value of £50m, it is now worth £3bn - that's a lot of extra pints.

It is the product of a piece of Conservative Party legislation known as the Beer Orders, which, 15 years ago, forced the big national brewers to break up their tied estates. Huge amounts of capital have subsequently been sucked into the pubs sector to back independent pub companies such as Enterprise. To get a decent return, the financial backers have expected decent sales growth. The ugly side of that dash for growth has been the cheap price of booze that has fuelled our current binge drinking epidemic.

Now, Enterprise owns friendly local boozers. But its chief executive, Ted Tuppen, reckons problem pubs wherever they are should be closed down and quickly. As a cure for the problem it has its attractions and should be taken up by the police.

A more lasting solution probably lies in the deteriorating economics of the high street. Here, the pubs are undoubtedly finding life is getting tougher, just like other retailers. Price cutting is no longer an answer as trading statements show that plenty of people are avoiding town centres. Booze prices are already starting to rise and the cycle of cheap drinks and a rising tide of violence is slowly, gradually, being broken. It will take time but it will be a lasting adjustment.

Mediation is better than litigation

There is one footnote worth adding to the sorry saga of Equitable Life, the once proud savings institution that abandoned a £700m compensation claim against its auditor Ernst & Young (E&Y) on Thursday. As has been widely pointed out, the only winners out of Equitable's decision to pursue E&Y through the courts were the lawyers representing both sides who took home about £50m in fees.

The Equitable case against E&Y probably highlights better than any other recent case the general folly of trying to pursue your enemies through the courts.

It's not just the costs involved that ought to put people off. There is the obvious risk that you might not win or that your case will collapse, as happened with Equitable. But there are the other hidden costs as well, such as the valuable management time wasted and the damage to a company's reputation of being involved in the sort of public slanging match that a legal assault generally involves.

These days any prudent organisation ought to have at the top of their corporate agenda a policy of avoiding legal proceedings as far as possible and, instead, looking for an alternative.

Arbitration is an obvious one. This process generally involves two opposing sides approaching a judge in private who will determine the facts and decide how much one side should pay the other.

But there are flaws with this approach as well, not least that both sides lose pretty much all control over the eventual outcome. There is, however, another alternative that is winning an increasing number of fans among management teams fed up with seeing so much money being blown in legal fees.

Mediation might sound rather too touchy-feely for the hard-nosed corporate world but it is proving surprisingly effective in sorting out a large number of tricky commercial differences.

J Sainsbury, for instance, used a professional mediation service to settle its pay dispute last year with Sir Peter Davis, rather than have the potentially embarrassing row dragged through the High Court.

Mediation is based on the art of shuttle diplomacy and structured negotiations. It tends to force both sides to focus on the key issues early on in the process with the aim of arriving at a negotiated agreement.

It saves time, legal fees, and both sides get to have a say in the outcome. The UK is becoming a world leader in a practice that doesn't rob lawyers of their livelihoods completely but does generally get arguments sorted out rather more efficiently.

An organisation such as the Centre for Effective Dispute Resolution, one of the country's leading mediation services, settles about 700 cases a year, 15 per cent of which are international.

If there is a final lesson from the Equitable tale, it is that mediation is better than litigation.

d.reece@independent.co.uk

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