Jeremy Warner's Outlook: Chancellor should look to the mote in his own eye for clues on Britain's productivity record

Telecoms: the end of price regulation
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The Independent Online

Competitiveness and productivity are to be a main theme of this year's Budget. When were they not? Yesterday provided a taster with the announcement by Gordon Brown of a new International Business Advisory Council to inform the Government on how to respond to the challenges of globalisation. If nothing else, this demonstrates that the prime minister in waiting is at least as capable as the incumbent when it comes to hobnobbing with the world's business elite.

The Council is a truly impressive one, containing such luminaries of the business world as Jean-Pierre Garnier (GlaxoSmithKline), Bill Gates (Microsoft), Lord Browne of Madingley (BP), Sir Terry Leahy (Tesco), Lee Scott (Wal-Mart), Li Ka-shing (Hutchison Whampoa), and so on.

The fact that it will meet only once a year doesn't exactly inspire confidence that it will come up with anything worth while, but full marks, none the less, to the Chancellor for persuading such a firmament of stars onto his advisory panel.

Given the current row over Labour Party funding, which has seen business reputations trashed by the gongs for cash scandal, it cannot have been easy. Association with the ruling Labour Party might these days seem to do you more harm than good. Even so, the Chancellor has assembled quite a roll call of the great and the good.

Add in the redoubtable Alan Greenspan, former chairman of the Federal Reserve (he's advising separately), and you might even imagine there being some chance of the Chancellor getting it right.

Unfortunately, Mr Brown speaks with forked tongue on these matters. When it comes to competitiveness and productivity, he's long on rhetoric, short on substance. To the contrary, many of his policies seem positively designed to reduce them.

How else, other than in public policy failure, to explain the slump in business investment as a proportion of GDP to one of its lowest levels since records began, this despite buoyant levels of corporate profitability?

How else to explain some of the lowest levels of productivity growth in the developed world? And how too to explain Britain's steady relegation down the league tables of international competitiveness? The latest example comes from KPMG, whose Competitive Alternatives report shows the UK falling from third to sixth place as a low cost destination for international business.

For some years now, Treasury forecasts have anticipated a sharp revival in business investment, yet for some reason, capital spending outside the public sector remains doggedly subdued. True, there has been some recent signs of a pick-up. Britain's high reliance on service industries may also mean that the official figures understate the reality. Investment in services is more difficult to measure than in manufacturing. What's more, the official statistics are acknowledged to have underestimated the amount of investment in software and IT.

Even so, the underlying picture is one of general refusal to invest accompanied by consequently poor levels of productivity improvement. Business surveys repeatedly point to tax and red tape as two of the main causes. Yet public policy seems set to discourage private investment in other areas too.

One of the main stays of the UK equity market used to be our big final salary pension schemes. Solvency regulation which forces a more equal matching of future liabilities with current assets has deliberately pushed these funds out of high risk shares and into low risk bonds. Capital which once funded the backbone of British industry has instead been channelled into gilts, where it helps fund growing expenditure on the National Health Service and other aspects of the welfare state.

Public sector spending is crowding out private sector investment.

Much the same phenomenon rules in the economy as a whole, where a relatively high exchange rate has, by allowing low inflation and low interest rates, encouraged high levels of debt-fuelled consumption. Rather than flowing into productive assets, savings have flowed instead into unproductive bricks and mortar, where through rising house prices they have encouraged yet more consumption by making people feel wealthier.

The contradictions don't stop here. When it comes to mixed messages, the Chancellor is a master. Mr Brown is teaming up with a host of City institutions to develop a strategy for maintaining London's competitiveness as a financial centre. Yet he also plans another raft of anti-tax avoidance measures to thwart the antics, as least as far as Britain's own tax base is concerned, of one of the boom areas of City activity - structured finance. The point the Chancellor doesn't yet seemed to have grasped is that you cannot have it both ways - high levels of public spending and high levels of competitiveness. The two things are in many respects mutually exclusive.

Telecoms: the end of price regulation

The telecoms regulator has been promising to end price controls on British Telecom for as long as I can remember. Yet one way or another, regulators have always avoided going through with it. Ofcom has now finally determined that competition is sufficient to allow the removal of these shackles without risk of prices immediately going through the roof.

BT has been losing domestic subscriber market share at the rate of about 1.5 percentage points a quarter for some years now, but still claims something over a half the total market. Any attempt to put up prices would greatly increase the rate of attrition. Indeed, to defend such a dominant position, BT must in the round continue to cut prices quite steeply.

As long as the only effective competition to BT was confined to the cable companies and Cable & Wireless it would have been madness to remove controls, even after the rapid growth of mobile, which now accounts for nearly a third of all voice telephony. Carrier pre-select has created a plethora of new competitors, but more significantly, the advent of broadband, allowing "for all you can eat" packages of tariffs makes the whole business of regulating metered call charges largely redundant.

The removal of price curbs should enable BT to start operating like a real company for the first time in its history, free to bundle services and tariff structures into one so as to compete properly in the market. Some 35 per cent of BT's revenues still come from line rental and metered call charges.

By the end of the decade, the old means of telecommunications through public switched telephone networks will almost wholly have disappeared. In a market where competition for broadband subscribers is already fierce, BT hopes to maintain its position as a trusted brand capable of delivering simplicity of service at a competitive price. As things stand, the company seems to be managing this transition with a confidence few would have thought remotely likely just a few years back.

Might the abandonment of price controls alter this pattern by removing the old certainties? There is no reason to believe it should. In the business market, which has been deregulated for many years now, BT has managed to hold its market share at around 40 per cent for at least two quarters now, suggesting that it may finally have hit bedrock. If the same thing happens domestic subscribers, BT and its investors ought to be more than pleased with the result.

The trick ultimately is to persuade consumers to spend the amounts they save from constantly falling prices or more services. In mobile, once thought of as the big growth area of telecommunications, this is proving ever more problematic. Perhaps strangely, fixed line begins to look the more appealing bet with the growth of broadband, wi-fi and the services that can be run across these technologies.

With freedom from price controls, BT Retail is finally on the front foot once more, after years in which its approach was best characterised as the dogged, but doomed defence of monopoly. A few more years, and BT might even accept the case for retail's full demerger.

j.warner@independent.co.uk

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