Michael Harrison's Outlook: Golden Brown gets helping hand from ONS

Tort thought; Transport delights
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The Independent Online

Why bother to fiddle the figures yourself when you can get the Office for National Statistics to do it for you? The decision to reclassify the £5bn or so that Britain spends on road repairs each year as capital and not current expenditure, so making it easier for Gordon Brown to meet his golden rules, looks about as dodgy a piece of statistical jiggery-pokery as it is possible to imagine. Since when did employing a man in a yellow fluorescent jacket to lay out road cones count as capital investment? Anyone would think there was an election in the offing.

Why bother to fiddle the figures yourself when you can get the Office for National Statistics to do it for you? The decision to reclassify the £5bn or so that Britain spends on road repairs each year as capital and not current expenditure, so making it easier for Gordon Brown to meet his golden rules, looks about as dodgy a piece of statistical jiggery-pokery as it is possible to imagine. Since when did employing a man in a yellow fluorescent jacket to lay out road cones count as capital investment? Anyone would think there was an election in the offing.

The golden rule to bear in mind, of course, about the Chancellor's fiscal rules is that they were invented by a politician. This means that they can be bent to suit the circumstances. A bit like Mr Brown's five tests for entering the euro, the golden rule which says that over the economic cycle the Government should borrow only to invest, will be met when he decides it has been met.

In the early part of the year, it was touch and go whether Mr Brown would end up in the red. As it turns out, the surge in the crude oil price has come to his rescue, inflating oil company profits and hence tax receipts so much so that the public finances recorded a healthy surplus of £6.6bn in January, enabling the Chancellor to declare that politicians do indeed fulfill their promises as he toured marginal constituencies in Staffordshire.

Whether the cycle ends next year, as current Treasury thinking has it, or this year, as the Bank of England reckons it will, is less important. What is not in dispute is that the public finances will start the next cycle in much poorer shape and with a hefty structural deficit. Because the golden rule is expressed as a percentage of GDP rather than a raw number, the surpluses the Chancellor enjoyed at the start of the current cycle were bigger in relative terms than the deficits he is now enduring, making the rule easier to obey. When the next cycle starts, however, then assuming continued GDP growth the surpluses at the end will need to be a lot bigger than the deficits at the start in order to balance the books.

Luckily, the Chancellor can always rely on the ONS to come to his rescue. The golden rule this cycle looks like being met with the help of the ONS's decision to exclude £21bn of debt in Network Rail's books from the public finances, even though the company is underwritten by the taxpayer and run by the Government in all but name.

Now the ONS has given the Chancellor a leg up for when the next cycle begins with its ruling on road expenditure. Supposing he is still at the Treasury after the next election, Mr Brown can spend as much as he likes filling potholes without it jeopardising his sacred rules.

The Tories declared it was a classic case of fiddling the figures and for once the hyperbole was not overdone. The ONS insisted that, although the reclassification had resulted from a joint study with the Treasury, no improper influence was exerted and it alone made the the final decision. With the national statistics now so discredited in so many areas, the time has long since come for a properly independent statistical body.

Tort thought

The end for junk lawsuits in the US? Don't bet on it. The "Class Action Fairness Act", which the President signed into law yesterday, is a big political win for Mr Bush in his crusade to rid the US of what he claims costs the economy $240bn every year. It is also one in the eye for the trial lawyers, major financial supporters of the Democratic party.

The bill will shift the bulk of such litigation ­ all cases involving more than 100 plaintiffs and $5m in damages ­ into less sympathetic federal courts. It will thus curtail so-called "venue shopping" whereby tort lawyers seek out state courts which have a habit of dishing out massive awards for class action suits. The most famous of them, of course, is Madison County in southern Illinois, a hitherto unremarkable corner of the mid-West now identified by business groups as the number one "judicial hell-hole" in all America. It also caps the size of lawyers' fees in cases which result in derisory sums being paid to individual plaintiffs, while a few lawyers rake in tens of millions.

In one typical horror story, a bank was successfully sued, resulting in an offensively large fee for the lawyers and a coupon worth 33 cents for each plaintiff ­ for which he or she had to mail in an application (which required a stamp costing 34c). To such cases, good riddance.

Claimants who have genuinely suffered will probably do better under the new system. But class action suits will continue. Even overburdened federal courts will not turn away genuinely deserving cases, while local courts will be able to take cases where two-thirds of plaintiffs and the chief defendant corporation come from that state. Nor is there anything to stop trial lawyers bringing the same case separately to several state courts at once. Most important, the legislation does not tackle the root issue of punitive damages, the sometimes colossal sums awarded by judges on top of compensatory damages, and which grab the most lurid headlines. Why not turn punitive damages into a straight fine payable to the federal government or the state?

Transport delights

Shares in the big rail and bus operators have been going like a train for the past seven months ­ in fact, ever since some bright sparks at Credit Suisse decided it was a good moment to tip the sector. Yesterday, Go-Ahead, which operates one in five London buses and commuter rail services between the capital and the south coast, demonstrated why. Passenger growth on the trains is back to those heady pre-Hatfield levels and Ken Livingstone's experiment in charging motorists for driving into the centre of London looks like being replicated in several other big cities.

The stock market value of Go-Ahead has risen by about a half since last August ­ but so has that of Stagecoach, National Express, FirstGroup and Arriva. Logically, it ought to be an ideal time for taking some of those profits but investors seem determined to stay on board. Go-Ahead greased the wheels yesterday with a share buy-back pledge and a 36 per cent increase in the dividend. Even then, its dividend policy is still more conservative than the rest of the bunch.

Government policy on transport is to avoid a car crash this side of the election at all costs and so the political environment looks like remaining benign. The national rail network, meanwhile, is safely back in the hands of the taxpayer and its regulator has been sidelined so there is no fear of a squeeze on future investment.

National Express, which reports next week, could join the buy-back trail and beyond that there is a steady flow of news to whet investor appetite with four new rail franchises due to be awarded over the next 12 months and London's congestion zone spreading.

The Hatfield trial of senior rail managers is a reminder of what can happen when things go wrong and the vulnerability of London commuter trains and high-speed intercity services to terrorist attack remains all too evident.

But the business of running trains and buses is a cash cow, so much so that Go-Ahead reckons it can buy back one-tenth of its stock and still replenish the coffers in time to finance the performance bond should it win the new Integrated Kent franchise later this year.

The poor old passengers, on the other hand, are still waiting for their dividend.

m.harrison@independent.co.uk

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