Jeremy Warner's Outlook: Chancellor remains optimistic on outlook

Rose consolidates grip on M&S
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The Independent Online

At the risk of being proved utterly wrong, I'm going to stick my neck out and predict that the Chancellor, Alistair Darling, won't further cut his growth forecasts in tomorrow's Budget.

In the face of a now quite plainly slowing economy, is this a credible position to adopt, or should the Chancellor be falling into line with most outside pundits, and be cutting further for both this year and next?

He's already done it once, in the pre-Budget report (PBR) in the autumn. Since then the economic outlook has deteriorated further, with no end in sight for the ongoing credit crisis. When Mr Darling reduced his growth forecasts in the PBR, he assumed a recovery back to trend in 2009. This now seems much less likely.

Yet there are two reasons for thinking the Chancellor will hold firm. One is that he seems genuinely to believe that economic prospects are better than the growing band of doomsters predict. Probably wrongly, he also thinks that the 10-year record of stability in the UK economy makes it better placed to withstand the storms blowing in from the US than almost everywhere else. Naive, perhaps, but Labour has to believe its own publicity.

Yet the more important reason why the Chancellor won't be further cutting the forecasts is that he can't, or not in any case without butchering any remaining claim to prudent management of the public finances.

As it is, the Chancellor has no room to mirror the US's forthright action in addressing economic weakness with a big fiscal stimulus. There's no scope for either cutting taxes to any significant degree, or further increasing public spending.

To the contrary, the plan as was is further to raise tax as a proportion of national income while simultaneously cutting spending, so as to reduce the size of Britain's structural budget deficit. These plans may now be quietly put on hold.

The situation wouldn't be so bad had not Mr Darling's predecessor in the job, Gordon Brown, already spent the fruits of Britain's economic growth. The most the Chancellor can do is to delay the squeeze, as to impose it into a downturn would only exacerbate the situation.

To maintain at least the pretence of keeping the public finances healthy, the forecasts have to be constructed so as to make the number stack up. As the economy slows, we seem to be back to the world as it existed in the early to mid-1990s, where the Treasury dreams up an acceptable outcome for the public finances and then designs a growth forecast to match. Experience shows that tax revenues always suffer badly in a downturn, forcing the Chancellor to raise taxes just at the moment he would most want to avoid it. This may be the ultimate outcome, but the Chancellor is certainly not going to tie his hands by deliberately forecasting such a turn of events.

After the disaster of the PBR, when a number of poorly thought-out tax reforms were announced in apparent preparation for a snap election that never was, the Chancellor will be desperate to restore his reputation for boringly predictable competence.

To deflect attention from the worsening position in the economy and the public finances, there will be lots of greenery (a convenient excuse for raising taxes) and welfare, with a particular focus on the Government's aim of eradicating child and energy poverty. But the big numbers won't alter very much.

In the City, there is a widespread view that the Chancellor has already blown his position beyond redemption with ill-conceived proposals for taxing non-doms and capital gains tax reform. Though the Chancellor has partially backtracked on both, the damage is largely done in terms of Labour's relations with business.

Not without justification, one business leader complains of a capricious and oppressive tax system with one reform piled on another without regard for the law of unintended consequences. On corporation tax and many other aspects of business taxation, the country is fast becoming uncompetitive with its major rivals. The Treasury talks the rhetoric of tax simplicity, but seems to practise the very reverse.

While Chancellor, Gordon Brown famously didn't allow his Prime Minister to see the Budget before it was announced. This one will have been micro-managed by Number 10 down to the smallest detail, as indeed was the PBR. Mr Darling's mistakes and those of the Prime Minister are thus one and the same thing, which may make Mr Darling better protected in his position than assumed. Yet he desperately needs to restore an air of calm and trust around what the Treasury and Revenue are doing. It's a big ask after all that's gone wrong in the last eight months.

Rose consolidates grip on M&S

The combined code on corporate governance invites companies to comply or explain. As far as I can see, the only explanation for Sir Stuart Rose's elevation from the position of chief executive of Marks & Spencer to that of executive chairman is that he might have left had he not been given the chairmanship.

With Sir Stuart's contract due to expire in July 2009, there have been growing questions over the succession. Yesterday's package of boardroom changes locks him in for a further three years, and so quashes any remaining doubts in this regard. Lord Burns, the present non-executive chairman, has selflessly agreed to stand aside in order to facilitate the consolidation of power in Sir Stuart's hands. But did the company really need to go quite so far to be sure of Sir Stuart's loyalty? What would have been wrong with him carrying on for another three years as simply chief executive, with either Lord Burns or some such other remaining in place to safeguard against executive hubris? Sir Terry Leahy at Tesco, and Sir Martin Sorrell at WPP, seem quite content to abide by these arrangements.

Corporate governance reforms enshrined in the combined code post the Marconi collapse and other corporate disasters of the last downturn are with the passage of time being progressively eroded or ignored.

Already the rule which debars anyone from holding two FTSE 100 chairmanships has been axed, while the one requiring the roles of chairman and chief executive to be separated, or the chief executive stepping into the chairman's shoes, is now routinely ignored. This flouting of the rules is occurring just in time for the next round of corporate scandals as the economic slowdown takes hold.

There's an element of back to the future about Sir Stuart's coronation. For nearly 10 years during the 1990s, Sir Richard Greenbury ruled the roost as chairman and chief executive until eventually nobody could stand up to him and the company became a personal fiefdom. That's the point at which it also lost the plot.

What's more, they got rid of the last non-executive chairman, Paul Myners, because it was felt he was too close to Sir Stuart to exercise the required restraint. Now, the two positions are getting up so close they have become one and the same person.

Everyone loves Stuart so it seems unlikely there's going to be much of a rebellion, and there is no clear successor at M&S. If the board had gone outside in the search for one, there would have been loss of momentum during what could be an exceptionally difficult period for the group.

Even so, with the share price back to the level it was at when Sir Stuart was parachuted in four years ago, there are bound to be concerns. The disappointment of the last trading update was blamed on the economy, but some saw it as perhaps indicative of more deep-rooted problems with range and strategy. The recovery story is still far from secure. Is this really the right time for Sir Stuart to be concentrating his talents on broader strategy matters and overseas expansion?

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