Jeremy Warner's Outlook: IMF again at odds with Chancellor's forecasts

Capital/GWR; Taxing aviation fuel
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The Independent Online

Yesterday's "World Economic Outlook" from the International Monetary Fund will have done nothing to improve relations between the Washington-based monetary authority and the UK Treasury. The IMF's assessment of the UK economy is not a flattering one. What's more, its forecast of growth for next year is significantly adrift of the Treasury's more upbeat assessment. The Chancellor is forecasting growth of between 3 and 3.5 per cent. The IMF reckons we'll struggle to achieve 2.5 per cent, which is lower than Spain and not much more than France and Germany.

The significance of this prediction is that unless Mr Brown raises taxes or cuts spending, which hardly looks likely in an election year, it would almost certainly put the public finances in breach of the Chancellor's golden rule, which requires him to balance the budget across the economic cycle. The IMF is equally downbeat about other aspects of the UK economy. To the IMF, the housing market remains a big worry, and it thinks the Bank of England needs to raise interest rates further to head off inflation.

The Treasury seems to be on firm ground in questioning the IMF's judgement. The IMF has already been forced to revise up its forecast of growth for this year from just 2.6 per cent to 3.4 per cent and it has been warning about possible fallout from the housing market for years, so far to no effect. Growth has consistently been higher than the IMF thought it would be and the housing market has yet to cause the economy any significant damage.

On interest rates too, the IMF is almost certainly behind the curve. We may see another quarter point before rates reach their cyclical peak, but hardly anyone expects them to rise beyond 5 per cent this year, and if the IMF is even half way right about next year's slowdown, there may even be a case for cutting them again early in the new year. All that said, a marked slowdown in both the housing market and consumption seems now very definitely to be under way. All the data points in that direction. Consumer confidence has sunk to an 18-month low, the number of retailers reporting a fall in sales outweighs those seeing a rise for the first time since March 2003, and the number of home buyers seeking a mortgage has sunk to a four-year low. And that was just yesterday's raft of downbeat news.

None of this seems at the moment enough significantly to damage Labour's re-election prospects, but for the Chancellor, if not Tony Blair, who would like more time for Iraq to settle before Parliament is dissolved, the general election will come not a moment too soon. With growth slowing and the public finances in worse shape than they've been in years, the Chancellor's halo may be about to come flying off. As with chief executives, chancellors like to bow out on a high note so that those who follow can be blamed for any subsequent downturn. Frustratingly, his next door neighbour shows no sign of wanting to give him that chance.


What is it about media mergers that the top job always has to be divided in two? The Capital Radio/GWR merger conforms to type in settling on a management structure that makes Ralph Bernard, boss of GWR, executive chairman of the combined group, and David Mansfield of Capital its chief executive.

Exactly the same thing happened with the merger of Carlton and Granada to form a single ITV. Michael Green was to become executive chairman and Charles Allen the chief executive, even though they quite plainly despised each other. It was the only way the merger could be agreed, yet even as they grinned at each other for the cameras and made cooing noises about a marriage made in heaven they were preparing to knife each other between the shoulder blades. Mr Allen managed to get his in first.

On the face of it Mssrs Bernard and Mansfield should be capable of a better relationship. They've been fierce business rivals, but they don't obviously hate each other and they've agreed a division of responsibilities which may just about be workable. If anyone dares to put so much as a cigarette paper between them, they'll be down on the perpetrators like a ton of bricks.

Yet though the new company will be a goliath in commercial radio terms, it's a quite small and uncomplicated business in other respects and certainly nowhere near big enough to qualify for the FTSE 100. The synergy benefits of merging the two amount to less than £8m a year. The new company seems scarcely big enough for one powerful media ego, let alone two. They cannot both have their place in the sun.

So other than being a fudge, what's the point of dual boss structure? In part, it's down to the influence of Daily Mail & General Trust, which as a big shareholder in GWR is determined to protect its investment by having its own man in a top slot. Rightly or wrongly, Daily Mail is sceptical about Mr Mansfield, who it suspects of mismanaging the core 95.8 franchise.

It is also important that both players are seen to be batting from the same wicket in arguing the case for the merger with competition regulators. If one of them faces the chop the moment regulators agree, that may not be so easy. However, once the integration is over, it is surely only a matter of time before the two start treading on each other's toes, if not overtly stamping on them.

It's all sweetness and light at the moment, but already the two are decidedly tetchy in answering questions about their proposed partnership, which from the outside looks more Pinkie and Perkie than Hanson and White. The Higgs code on corporate governance allows companies that choose not to comply to explain. I'm not sure an adequate explanation has yet been given.

Still, there's no apparent opposition to the arrangement from leading shareholders, and if speculation that Clear Channel of the US is only waiting for regulatory clearance before pouncing on the newly formed company is true, they may not be there for long enough to develop a serious difference of opinion in any case.

Taxing aviation fuel

With airlines around the world nosediving into the financial abyss, this might not seem the most appropriate of times to be broaching the subject of slapping a tax on aviation fuel, yet that hasn't stopped the incoming European Union Transport Commissioner, Jacques Barrot, from stumbling into the debate. Speaking to European MPs yesterday, he said the present exemption on aviation fuel would be a good subject for review once fuel prices have settled down, as the effect of the exemption was to distort competition with other forms of transport.

As things stand, the exemption is sanctified in international treaty, and bar causing a complete breakdown in international air travel, there's not much M. Barrot could do about it as it applies to travel between Europe and the rest of the world. But I guess it is remotely possible that a tax could be imposed on internal EU travel. As his name suggests, M. Barrot is a Frenchman and presumably his views are coloured by a French agenda. In many parts of France, the low-cost airlines are still seen as a distasteful Anglo-Saxon invention which are undermining the TGV and other forms of rail travel. Luckily, M. Barrot isn't the tax or competition commissioner, so he's virtually no chance of getting his proposal even considered, let alone on to the statute book.

But he's in any case barking up the wrong tree. The reason why tax exemption on aviation fuel is offensive is not because it distorts competition. All other things being considered, I doubt whether the effect on competition is any more than marginal. The problem with the tax exemption is rather that it means aviation doesn't pay its proper environmental cost. Aviation is reckoned to contribute about 3 per cent of the greenhouse effect, yet there are virtually no incentives to make it more fuel efficient. The solution to the problem is not to tax air travel more, but to make aviation part of the proposed European emissions trading system. M. Barrot's energy would be better expended on securing its inclusion than pursuing the French obsession with taxing everything to the hilt.