Jeremy Warner's Outlook: Manipulating the Golden Rule won't save Chancellor from having to raise taxes

FSA bows to pressure for reform - SABMiller's achievement
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Yet the Chancellor's self-imposed rules are now proving so flexible that they are fast losing all credibility. The case for an independent body other than the National Audit Office to monitor and approve the application of these rules, as advocated by the Lib Dems and the National Institute of Economic and Social Research, grows stronger by the day.

The decision by the Chancellor to add another couple of years to the Treasury's definition of the start of the current economic cycle at least has the merit of being laughably transparent. By so doing, Mr Brown makes it easier to meet his Golden Rule, which stipulates that he can only borrow to invest over the economic cycle as a whole.

By shifting the start of the economic cycle back two years from 1999 to 1997, the Chancellor gives himself an extra £10bn of surpluses to count against the gathering mountain of deficits that now rule the public finances as government spending rises ever higher. The Treasury justifies this widening of the goalposts by pointing to recent Office for National Statistics revisions showing GDP growth in those years as higher than previously estimated. Ergo, the cycle too must have started earlier than previously thought.

Mr Brown continues to insist that the Government would have met his Golden Rule even without these changes. With the economy now slowing fast, undermining Budget projections of likely tax revenues for this year, few would agree with him.

If you add back in the benefit the Government received when road maintenance was reclassified as investment rather than current spending, together with the advantage of having Network Rail's Treasury debt classified as off-balance-sheet - despite the fact that it is underwritten by the Treasury - then Mr Brown is arguably already in breach of the Golden Rule.

In the final analysis, the rule means exactly what the Chancellor wants it to. He decides when the economic cycle begins and ends and, supported by the ever helpful Office for National Statistics, the mumbo jumbo of definitions as to what amounts to current spending, and what can be borrowed for as investment, seems routinely to be manipulated to suit his ends.

The Tories see an even wider problem of definitions. Under the sustainable investment rule, the Government is obliged to keep the total stock of public borrowing beneath 40 per cent of GDP. Should not the public sector's unfunded pension obligations - amounting to hundreds of billions of pounds - be treated as part of government borrowing?

The Treasury thinks not, though common sense would dictate that such liabilities are a form of public sector debt. Certainly this is how the Government's new pensions regulator has invited private sector firms to view their unfunded pension obligations.

Does any of this really matter? On a purely technical level, this latest wheeze eases the pressure on the Chancellor to impose tax rises next year, which given that the economy is weakening might have proved highly damaging. However, it has probably only delayed that point. The Treasury currently expects the economic cycle to end in 2005/6, though given how fluid these things seem to have become, it's anyone's guess whether this will in practice be the case. Whatever. The Government will be starting the new economic cycle with the public finances seriously in deficit. To stand any chance of making these deficits up and thereby meeting the Golden Rule in the next cycle, the Chancellor will either have to cut spending or raise taxes.

The other significance of yesterday's decision is that it shows the Government is prepared to be flexible with its rules, that it won't rigidly adhere to them if it thinks they might interfere with spending priorities. Like the Chancellor's five economic tests for joining the euro, the Golden Rule is in truth just a pretext, an elaborate charade to add a veneer of fiscal discipline and credibility to the public finances while in practice allowing the Chancellor to do largely what he wants.

The markets would punish him severely if he strayed too far from the straight and narrow, as they have most of his predecessors. But let's not pretend the rules as presently constituted are the rigid system of fiscal discipline they are cracked up to be. Plainly they are not.

FSA bows to pressure for reform

The City has two main criticisms of the Financial Services Authority. One is that the burden of regulation is too intrusive and costly. The other is that in matters of discipline and enforcement, regulation is unduly oppressive without sufficient safeguards to ensure natural justice. The FSA went quite a long way to answering the second set of criticisms yesterday by announcing wide-ranging reforms of its enforcement procedures.

The review follows stinging criticisms of the FSA by an appeals tribunal which found the City regulator's procedures and findings in attempting to discipline Legal & General for endowment mis-selling seriously flawed. It is to the credit of David Prosser, the chief executive of L&G, that he decided to stand up to the FSA and mount this test case of its powers.

The FSA would deny it, but in the City the regulator is widely seen as applying bully boy tactics in persuading firms to accept discipline for offences which are frequently disputed. In return for not challenging the FSA's strictures, firms are offered comparative leniency. Nor has there been any proper separation of powers, with the FSA set up to act as investigator, prosecutor, judge and jury. This was never likely to deliver natural justice, despite rights of appeal to a tribunal, and there is plenty of evidence to suggest that it hasn't.

In meting out its punishments, the FSA seems to have forgotten the old maxim that justice not only has to be done, but be seen to be done. Yesterday's reforms will help to make the process more transparent and accountable, as well as introducing some basic separations in enforcement procedures.

The FSA might have commanded more support for its reforms if they had been recommended by an outsider. The fact that they come from an FSA footsoldier, David Strachan, means that punches have been pulled and a more root and branch approach to change has been resisted. Still, the FSA has plainly been listening, even if the proof will be in the eating. As for the costs of regulation, there appears to be little relief in prospect on that front.

SABMiller's achievement

Most of the South African companies that chose to relocate to London in the late 1990s have done well out of the move, but none can claim to have been quite as successful as South African Breweries, now known as SABMiller. Yesterday's $8bn acquisition of Columbia's largest brewer, Bavaria, cements SABMiller's position as one of the world's largest global players. South Africa was hardly the most likely of starting points for such an empire, nor beer the most likely of foundations.

Yet SAB's chief executive, Graham Mackay, stuck to his vision of global consolidation, and remarkably managed to carry the City with him. The curiosity is that no home grown British brewer has managed anything similar. The closest is Scottish & Newcastle, but S&N is less than half the size in terms of market capitalisation and not nearly so international. Bass, Whitbread and the rest have all been swallowed by other foreign domiciled brewers.

In building his empire, Mr Mackay has used the capital markets skilfully to his advantage. More important still, he's had the hunger and drive of the newly arrived to succeed.

j.warner@independent.co.uk

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