Jeremy Warner's Outlook: Darling may be forced to trim forecasts

Airport prices squeeze for Ferrovial; A charitable reason for saving the Rock
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The Independent Online

Still no official confirmation, but unless Treasury officials are unnecessarily burning the mid-night oil, both the results of the Government's comprehensive spending review and the pre-Budget report (PBR) will be announced to the Commons on Monday. Everything in politics nowadays is seen through the prism of whether there's going to be a snap autumn election, so what does the new Chancellor, Alistair Darling, have in store?

As a piece of traditional electioneering – lots of new spending commitments and tax giveaways – the PBR is going to be a damp squib. The Chancellor's near-term room for manoeuvre has been ground down to virtually zero. If anything, he's going to have to trim his forecasts for revenue and economic growth, which in turn could mean an even tougher spending squeeze than the one already pencilled in.

The Treasury's forecast of 2.75 to 3.25 per cent growth in output for this year looks safe enough after a stonking first half, but further out the assumptions are beginning to look over-optimistic. Next year's forecast of 2.5 to 3 per cent growth seems particularly at risk given the slowdown in the US economy and the accompanying credit turmoil.

These events cannot help but have an impact on the UK economy, which despite its underlying strength is bound to remain vulnerable to whatever happens in the US. A cautious Chancellor would therefore adjust his forecasts – possibly not by much, but certainly by a quarter point or so for next year. That's going to make meeting Gordon Brown's "golden rule" an even tougher ask than it was already. A belt-tightening message is not the one you would normally want to take into an election with you, yet, bizarrely, the mantra of prudence may work to Labour's advantage.

Time was when the Tories would routinely lecture Labour for its lack of financial discipline. Time and again in the post-war period, Labour has been sunk by undeliverable spending commitments, both in government and out of it. Now the boot is on the other foot, and it seems to be David Cameron who is irresponsibly promising the world.

A £1,000 tax-break for married couples, the abolition of inheritance tax – it all looks good on paper, but where's the money coming from? Already, George Osborne's plans for slashing inheritance tax by bringing non-doms into the tax net have been exposed as flawed.

Labour by contrast, has become the party of economic competence. If there is an election message in Monday's slew of initiatives and spending plans, it must surely be this. With all eyes on the ballot box, there will be lots of long-term commitments to more spending on education, training, health and infrastructure. The Chancellor might even say something about taxation of non-doms and private equity partners.

Yet the shorter-term outlook for the electorate is for a period of austerity, at least compared to what we've had. In the round, there will be no tax giveaway. To the contrary, there could even be a squeeze.

Can such a message hope to be an election winner? It's yet another question for Mr Brown as he agonises on whether to go to the country early.

Airport prices squeeze for Ferrovial

Poor little diddums. There were predictable squeals of pain from Ferrovial's Rafael del Pino yesterday over proposed new price controls for British airports. Apparently they've jeopardised Ferrovial's plans to refinance up to £10bn of the debt. Yet does anyone other than Mr del Pino and his colleagues give a stuff?

Ferrovial knew the risks of a harsh regulatory review when it paid top dollar for BAA more than a year ago, yet it ploughed ahead regardless. If the Spanish construction and infrastructure group now loses its shirt, which, as I will explain, in any case seems rather unlikely, then it only has itself to blame.

Ferrovial believes itself a victim of the previous pricing regime, which was almost certainly far too generous. For too long, BAA has been allowed to make merry at the passengers' expense. Now regulators may have over-reacted the other way in an attempt, as it were, to restore the balance. But again, if that's the case, Ferrovial only has itself to answer for. The previous BAA board seems to have been a better judge of the risks involved than the Spanish.

It is quite hard to see what Ferrovial is complaining about. The regime proposed by the Competition Commission is on the face of it better than that originally suggested by the first-line regulator, the Civil Aviation Authority. The CAA proposed to cap charges for Heathrow at inflation plus 4-8 per cent. The Competition Commission has opted for a top of the range 7.5 per cent.

OK, so the allowed rate of return on capital is reduced from the current 7.75 per cent to just 6.2 per cent, but this is still quite a lot higher than the airlines think appropriate. Ferrovial was warned that the debt-laden structure it used to finance the takeover of BAA would likely reduce its perceived cost of capital as far as regulators were concerned, and therefore its allowed rate of return. It chose to ignore this advice.

Just for a moment turning the telescope the other way, is it really fair to assign a lower rate of return to Ferrovial at a time when costs are rising steeply to deal with years of under-investment and a crisis in service standards? A series of terrorist events has also made it riskier to own airports. What's more, the penalty regime for failure in standards of service is being made much harsher. Ergo, the allowed rate of return should be higher, not lower.

There is plenty of opportunity for BAA to convince regulators to change their minds in the seemingly interminable toing and froing that the regulatory review involves. The Competition Commission's recommendations now go back to the CAA, which then publishes a revised set of proposals for public consultation before a final ruling in February.

Still, I doubt BAA's Spanish owners will make much headway. Public goodwill is in short supply when it comes to the state of Britain's airports . New management has not yet succeeded in restoring BAA's reputation. The case for more money to raise standards is not a bad one. Yet you don't counter years of neglect by demanding an immediate hike in prices.

BAA has been taking the passenger for a ride. If standards were poor under a comparatively generous pricing regime, there is no reason to believe they will be any better under an even more generous one. To the contrary, they are likely to slip further. As far as I can see, the Competition Commission has got the balance about right.

A charitable reason for saving the Rock

A hitherto largely forgotten victim of the Northern Rock debacle is one of the biggest charities in the country and certainly the biggest in the North-east – The Northern Rock Foundation. Established in 1997 when Northern Rock demutualised, the foundation lays claim to 5 per cent of the mortgage bank's pre-tax profits.

In any takeover, it would immediately be entitled to 15 per cent of the company. If Northern Rock were put into administration, it would get next to nothing. Deserving causes throughout the north of Britain would suffer.

The existence of this charity is yet another reason why the Treasury and the Bank of England, who together now effectively call the shots at Northern Rock, must not allow themselves to be bamboozled into allowing the company to be flogged off on the cheap.

Northern Rock is almost certainly worth quite a lot more than its now bombed-out share price indicates. To allow Chris Flowers to buy the company for a pittance simply because he's got the expertise and contacts to arrange the necessary refinancing of the mortgage book would not be a good outcome. If Mr Flowers can do it, others can too, leaving a bit more in it for the shareholders, including The Northern Rock Foundation.