Michael Harrison's Outlook: Brown skating on thin ice as deficit soars

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The tills may not be ringing quite as merrily on the high street as they ought to be at this time of year. But there is one place where money appears to be no object.

The tills may not be ringing quite as merrily on the high street as they ought to be at this time of year. But there is one place where money appears to be no object. Government spending rose by a stonking 17 per cent in November, underlining how important the public sector is as an engine of economic growth but leaving Gordon Brown with a public sector deficit of £9.4bn to finance. That's at least £3bn worse than the City had been expecting. With four months of the financial year still left, the public sector net borrowing requirement stands at £32.7bn - just £1.3bn short of the figure the Chancellor forecast for the year as a whole in his pre-Budget report less than three weeks ago. More worrying, the current budget deficit - that's spending on staff and wages as opposed to investment in new facilities and better services - is galloping ahead at a rate which suggests his slender margin for sticking to his self-imposed golden rule will be shot to bits.

For Mr Brown to hit his target and keep to his fiscal rule of borrowing only to invest over the economic cycle, then one of two things has got to happen. Either tax receipts have got to rise sharply or government spending has to slow equally quickly. Mr Brown may be in luck on both counts for public spending tends to be front-end loaded whereas tax receipts tend to flood in towards the end of the year as January's self-assessment deadline looms. The Treasury is expecting a further year-end boost to government receipts from oil-related taxes. But it will be a close call.

There is one other way in which Mr Brown can stick to his golden rule - and that is by fudging the date at which the economic cycle ends. He cannot do much about the electoral cycle, however. And as the Government heads for the polling stations in a matter of months, the other engine of the UK economy, the housing market, shows fresh signs of stuttering. Prices are falling more quickly and mortgage lending is down sharply from its peak.

Further public sector expansion can take up the slack but in the long term creating more and more non-productive jobs it is not a sustainable way to run an economy. Post the next election, the Chancellor will face an enormous budget deficit, irrespective of whether the golden rule has been met, and immense pressure either to slash public spending, raise taxes or both. Not a very attractive prospect, either for Mr Brown or a successor.

Yukos auction

Lot no 1: the chief production asset of Yukos, Russia's largest oil company. The guide price says $22bn but shall we start the bidding at, say, $8.6bn? Do I have any advance on $8.6bn? Yes, you sir, the gentleman in the front row wearing the shapka. $9bn? Thank you. Now it's with you, sir, the representative from Gazprom talking into a mobile phone at the back of the room. I'm sorry, I'm afraid we can't take telephone bids. Both done? Then it's going, going ... one moment, I'm offered $9.35bn from the front row. You do realise you are bidding against yourself, don't you sir? Very well sold to the gentleman in the shapka for $9.35bn. Where shall we send the title deeds? Let me just write that down. The Baikal Finance Group, c/o Dionis liquor store, 12b, Novotorzhskaya St, Tver. That's a funny sounding address.

Welcome to the Dutch auction, Moscow-style, except that over there the price does not keep coming down until someone bids, it just never really goes anywhere in the first place.

If you have never heard of Baikal Finance before, don't worry. Nor had anyone else in Russia until last weekend. It has only been registered for a few days and doesn't possess a single oil well or even a website and yet it seems to have come up with £4.8bn to buy the main asset of Yukos for a fraction of its true value.

What we do know about Baikal Finance is that it is, without doubt, a front company for somebody. Perhaps the state-controlled Gazprom itself. Perhaps even the Russian government. Baikal has 14 days to pay. If it fails to come up with the cash, then the government is entitled to step in and claim ownership. That would be a neat way of getting its hands on the assets while claiming that neither it nor any other part of the state apparatus had technically bid at auction, which they are prevented from doing by a US court order.

It may not be the end of the saga for Yukos's main shareholder Mikhail Khodorkovsky, who is languishing in jail on fraud and embezzlement charges and has pledged to fight Vladimir Putin through the courts for as long as it takes. But it is almost certainly the end of Yukos.

From his prison cell, Mr Khodorkovsky denounced the cut-price sale of his company, comparing it to the way Russia's state-owned industries were privatised in the 1990s, as if for all the world he had not been the beneficiary of just such a rigged market.

Certainly, Sunday's auction of Yukos was a breathtaking display of political cynicism, even by the Kremlin's standards. President Putin has little to worry about from his own electors who mistrust the oligarchs even more than he does. But it is in the court of world opinion, and particular that of Western investors, where he has more to fear. After all, if the Russian government can steal a company from its shareholders, who would want to do business with it in the first place?

The iceman returneth

After enduring four years in the cold, two of which were spent being investigated by the Department of Trade and Industry, Malcolm Walker is back in the fold. A break-up bid of mind-boggling complexity for Big Food Group will see the founder and former chairman of Iceland back where he used to be, running the frozen food chain.

Mr Walker has bought back in for a fraction of the price he managed to sell his Iceland stake just before the thaw set in and the shares melted away like spring snow. At its height, Mr Walker's empire was worth £1.2bn. Yesterday Baugur and a collection of the usual retail suspects bought Iceland and the Booker and Woodward cash and carry businesses which make up the rest of BFG, for £326m. If nothing else, it demonstrates how bad mergers can be for your financial health. When Iceland bought Booker with its own shares in May, 2000, it paid more than the entire group is worth today.

Bill Grimsey, the outgoing chief executive of BFG, leaves with £2.7m in his back pocket, which is not bad going for taking the business nowhere in the past four years. In fairness, it began as a salvage job following the ravages of the Walker era and for a while BFG showed signs of recovering. At one point, Mr Grimsey was even bullish enough to spring a bid for the convenience retailer Londis. The bid failed but Mr Grimsey ploughed ahead with his plan to convert Iceland into a convenience-style format, relying less on frozen food and more on fresh produce. It hit a brick wall this year after Tesco suddenly got a taste for convenience food retailing and it has been downhill ever since, as the latest ghastly set of like-for-like sales numbers show.

Mr Walker's pledge to bring Iceland back to its basics may or may not work. One thing is certain, however. Investors will be in no hurry to climb aboard if he ever attempts to return Iceland to the stock market.

m.harrison@independent.co.uk

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