Jeremy Warner's Outlook: The cracks are beginning to show in the Iron Chancellor, but still it's hard to land a punch

Click to follow
The Independent Online

The pre-Budget report was a predictable mix of bewildering facts and figures, missed forecasts, stealth taxes, and repeated or stolen policy initiatives. Even the relatively inexperienced George Osborne managed to sound engaging alongside what he depicted as more akin to "tractor production data from the former Soviet Union" than a full and fair appraisal of the state of the UK economy.

Yet despite the shadow Chancellor's verbal dexterity, and the opportunity provided by Mr Brown's admission that he has fallen short of his forecasts for both growth and the public finances, Mr Osborne failed to land any more than a few glancing blows on this heavyweight of the political ring.

He might have stood more chance had he realised that the Chancellor has brazenly added another three years to the economic cycle, so as to make it easier for him to meet the golden rule, but it was left to eagle-eyed readers of the detail of the pre-Budget report documentation, which are released too late for the shadow Chancellor's speech, to spot that one. The Chancellor again demonstrates his penchant both for manipulating the figures and for punching below the belt with opponents.

Yet the voters only notice that the Chancellor is failing when the economy falters and, perhaps remarkably, that hasn't yet happened under this administration. Growth for this year is now forecast to be only half what Mr Brown said it would be, while he's going to have to borrow £5bn more than he said he would last March and three times more than he forecast three years ago. Borrowing is also forecast to be higher in each of the next five years.

But for oil, which has swelled the Chancellor's coffers with unprecedented quantities of tax, the situation would have been a great deal worse. Big bad oil is an easy target, so the Chancellor has clobbered it again by doubling the supplementary North Sea oil tax from 10 to 20 per cent.

Affordability is in the eye of the beholder, and though the Chancellor's plans might look sustainable so far as current expenditure is concerned, which is the measure by which he judges adherence to the golden rule, it is in the area of investment spending where the big growth is taking place and the concern must lie.

Normally investment and current spending track each other closely; under the Chancellor's plans they are set to decouple violently. The Government thus falls within its own stipulation that it is only allowed to borrow to invest - the golden rule - but it still borrows heavily. All other things being equal, this might be expected to trigger sharp rises in long-term interest rates, making these spending plans eventually unaffordable. The only reason the City is not yet concerned, despite what are now regular borrowing overshoots, is that paradoxically interest rates have remained low.

The Chancellor would like to congratulate himself on this achievement too, rather in the same way as he would like to blame lower economic growth on higher oil prices, but in fact low interest rates are a global phenomenon caused mainly by the export of price deflation out of the Far East. Throughout the world they have allowed what would once have been considered recklessly high levels of public spending.

So despite the Chancellor's failure to meet his forecasts, he retains much of his fabled luck, and Mr Osborne's right jab doesn't yet connect. More investment in the public sector means less investment in the private, and because public spending tends by its nature to be less efficient, ever declining levels of productivity. It can take years for this loss of competitiveness to show up in economic failure, but it is small wonder that business has fallen out of love with Labour; it rightly feels under siege.

NTL opts to take a Virgin bride

NTL's proposed acquisition of Virgin Mobile is in danger of becoming a little bit overspun. It is indeed a significant deal which powerfully symbolises the changing nature of the communications landscape, but I doubt it much improves cable's competitive position against either British Telecom or BSkyB and it is certainly a much better deal for Sir Richard Branson than it is for NTL.

By using lowly rated paper to acquire highly rated shares, the latter will struggle to cover its cost of capital. Any expectation that independent directors of Virgin Mobile will be able to extract a better premium from NTL may be deluded. NTL is already paying more than it should.

For this it gets the strategic advantage of the so-called "quadruple play", enabling it to bundle pay TV, broadband, fixed line and mobile telephony together in one package.

This has already been shown to work well in the US in terms of customer acquisition and retention. Whether it will work quite as well in the UK, given that Virgin's customers are predominantly pre-pay with very high levels of churn, remains to be seen. The quadruple play is one of those ideas which looks great in theory; the practice is another matter, the more so as NTL already faces a huge management challenge in integrating Telewest. To absorb Virgin Mobile at the same time may be the challenge too far.

Despite these caveats, Sir Richard has bought into the vision so wholeheartedly that he's prepared to sell at virtually no premium in respect of his controlling stake. Out of courtesy to his minority shareholders and with half an eye on his future relationship with the City, he'll go along with the independent directors if they think NTL should be paying a bigger premium, but it is hard to see anyone else bidding, and NTL would find it equally hard to justify paying more.

Virgin Mobile is a great little business which has done everything it promised, but it is also no more than a branding and billing operation with no network infrastructure to call its own. There's little obvious strategy for the next generation of mobile technology, nor any obvious way of delivering it. If ever there was a time to sell, this is it.

For Sir Richard, the attractions are obvious. He gets a chance to stamp his brand on something much bigger, which may, if the quadruple play works, significantly enhance Virgin Mobile's market penetration. Of course, it could work the other way and end up polluting the brand, though the public relations disaster that is Virgin Trains doesn't seem to have damaged Sir Richard that much thus far. And at the very least, Sir Richard swaps his illiquid holding in Virgin Mobile for a smaller stake in a more liquid stock, making his eventual exit that much easier.

As for NTL, this is a deal born more of weakness than strength. From the start, cable has been a complete shambles in terms of customer service, making even British Telecom look like a model of efficiency and value for money by comparison. Not for nothing is NTL known as NTHell. For Sky, cable has never been a competitor at all, only another platform through which to sell its pay-TV wares. It won't be difficult for the Virgin brand to make headway in this arena.

Yet the chief problem cable has got is that it is an out of date technology. Having sunk billions into the pavements of Britain's major cities, it has been overtaken by a newer form of broadband and pay TV delivery that can be achieved at a fraction of the price - local loop unbundling. If the cable proposition were starting afresh today, it wouldn't bother with it's own optical fibre network; like Sky it would simply go the DSL route.

The perceived need to develop a quadruple play is in any case only recognition of the step change in competition which is occurring in these services, with every man and his dog apparently entering the broadband space and traditional fixed-line telephony fast becoming a thing of the past.

The way things are going, the quadruple play will soon be back to triple play, with fixed line entirely replaced by mobile. A good deal for Sir Richard then, and you can certainly see why Simon Duffy, the chief executive of NTL, is doing it. But he's got a lot less reason to be cracking open the champagne this Christmas.