Jeremy Warner's Outlook: New pilot at British Airways faces turbulence over attempts to address the pension deficit

House prices are picking up again; Murdoch scrapes home, but at a cost
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The Independent Online

The new Pensions Regulator has demanded that all companies come forward with plans for closing their deficits within 10 years. Do the maths: all other things being equal, that means BA has to find a minimum of £140m a year in extra contributions if it is to satisfy the regulator's demands.

Mr Walsh says that the company's contributions - which he claims are already five times higher than what employees put in - are already unsustainable. With debt and fuel prices still high, and no let up in airline competition, he's plainly in no mood to consider more. Yet unless employees are prepared to fill the gap instead, either by agreeing to cut benefits or increase their contributions, it is hard to see what option he has.

And Mr Walsh thought he would be running an airline when he signed up to join BA. Instead, he finds himself working for pensioners. The scandal of these deficits is that they were, at least in part, caused by the Chancellor's raid on dividend tax credits. If these had been left intact, the total deficit in company pension funds might be as little as half the £134bn recently estimated by the Pension Protection Fund. By now requiring companies to address these deficits, the Government has created a new form of taxation. Hey ho.

House prices are picking up again

Just what we needed: another housing boom. Even ever optimistic mortgage lenders had expected some fall in house prices this year, yet on the evidence of the latest surveys, which show a sharp rebound this autumn, prices are destined to end up firmly in positive territory again.

This may come as a relief to readers of the Daily Mail, but if it helps strengthen the case against further interest rate cuts, it is not particularly good news for growth. This time last year, the Bank of England was in tightening mode, in part because of the wider inflationary consequences of strongly rising house prices, which had helped fuel a boom in debt-fuelled consumption.

Rising interest rates did the trick in terms of taking the heat out of the housing market, but it also hit consumption hard, particularly high street spending. As a consequence, the Bank was forced to start cutting rates again last summer.

Unfortunately, the effect seems to have been the opposite of what was intended. Confidence has returned to the housing market, but not to the high street, which is anticipating a nightmare Christmas.

To make matters worse, we are experiencing a sharp uptick in inflation, caused mainly but not exclusively by rising fuel prices. If this eventually feeds through to rising inflationary expectations and higher wage claims, the Bank will feel obliged to act by raising rates again. Higher house prices add to the pressures for such action.

Now of course we haven't yet returned to the boom housing market conditions of a few years back. In fact, house price inflation right now isn't any higher than average earnings growth, which is the sort of level you might expect for such assets. Yet it is also on a rising trend again.

According to figures published yesterday by Halifax, it rose to 3.9 per cent last month, from as little as 2.3 per cent (its low point), in July. If house price inflation settles at this sort of level, it won't worry the Bank unduly. But if it accelerates back to double digit growth, then all bets are off.

The fall off in consumption is meanwhile only partially explained by the squeeze being put on disposable incomes by higher taxes and rising fuel prices. The other factor is that growth in consumer debt is slowing fast. Interestingly, this is more to do with renewed caution among lenders than an absence of demand. It can't yet be called a credit squeeze, but many households are finding it difficult to get access to more debt, which in turn is affecting their ability to spend. Bankers are doing the responsible thing, and putting up the shutters, but it's not much good for the economy.

Figures announced yesterday showing that personal insolvencies are running at a rate 50 per cent higher than a year ago and at around twice the level seen in the recession of the early 1990s are going to make lenders more cautious still. In fact these figures are not as bad as they look, as much of the rise is caused by the fact that it has become much easier to declare yourself bankrupt than it used to be. In particular, there has been a growing trend among young adults to declare themselves insolvent as a way of escaping their student debts. Yet the latest data is still quite worrying enough.

The last cut in interest rates looks with the benefit of hindsight to have been a mistake. All it's done is restimulate the housing market while doing little to encourage higher spending.

Further cuts might eventually relight the fire of consumption, especially if they spark another housing boom. Yet the last thing the economy needs right now is a resumption of debt-fuelled consumption. That will only put a rocket under inflation and lay the ground for an even worse demand shock further down the line.

Murdoch scrapes home, but at a cost

Did Allan Leighton and Jacob Rothschild know what they were letting themselves in for when they agreed to become non-executive directors of BSkyB? Perhaps they enjoy their role as public apologists for Rupert Murdoch's various corporate governance infringements, but somehow I doubt it. There are better things to do with one's time.

Reluctant they may be, but they also are plainly persuasive. Against the odds, the latest controversy was yesterday voted through, albeit by the narrowest of margins. For this Mr Murdoch must thank these two stalwarts of business and the City, who have put their own reputations on the line by assuring shareholders there is nothing to fear from the company's proposed buy-back.

News Corp has no intention of selling any of its 37.19 per cent stake in the buy-back, so the effect is to allow Mr Murdoch to gain creeping control of BSkyB without having to pay a premium for the privilege.

Many investors found this objectionable in principle. Non executives attempted to defuse the row by persuading News Corp to sign a legally binding agreement to waive any new voting rights acquired above the existing 37.19 per cent stake. They have also promised that there will be no further buy-back next year, though what happens thereafter is less clear.

If Mr Leighton thought these two commitments had done the trick, as quite a few shareholders assured him they had, he was mistaken. Nothing is ever simple with this still family controlled organisation, and the trouble is that there has been a separate corporate governance controversy going on at News Corp.

Here Mr Murdoch had promised to put poison pill arrangements designed to deter the ambitions of his media rival, John Malone, to a vote. Yet this he never did, raising the question of whether it is ever really possible for outside shareholders to trust Mr Murdoch. His own, maverick priorities always come first. Outside shareholders are there just to enjoy the ride or otherwise.

Mr Murdoch survived the vote, but the scars are all too evident in the share price, which after another pummelling yesterday is barely higher than it was 10 years ago. The latest markdowns were caused by a worrying rise in churn, but the Murdoch discount cannot be helping. Mr Murdoch agreed to provide shareholders with wine and sandwiches at next year's annual meeting. The question is, can he be trusted to keep his promises? Expect resignations if he doesn't.