Outlook: Britannic's first opens the gates for other insurers to follow

Tax cutting US; BHP Billiton

All life assurers have slashed their terminal bonuses in response to the falling stock market, and in most cases, the annual bonus has been cut sharply too. But until Britannic yesterday, no one's had the cheek to forgo the annual bonus altogether. Britannic's lead will no doubt open the floodgates to a host of other, cash-strapped life assurers looking to shore up crumbling solvency margins.

All life assurers have slashed their terminal bonuses in response to the falling stock market, and in most cases, the annual bonus has been cut sharply too. But until Britannic yesterday, no one's had the cheek to forgo the annual bonus altogether. Britannic's lead will no doubt open the floodgates to a host of other, cash-strapped life assurers looking to shore up crumbling solvency margins.

Humiliating and harsh though such a measure might be, it is also a surprisingly neat solution to the problem. Once declared, an annual bonus becomes an immediate liability for the life fund, even though it may not be paid for years. Solvency is none the less damaged correspondingly. One look at the figures tells you just how dire Britannic's position is. The cushion of assets over liabilities has shrunk to 6 per cent, or two percentage points above the regulatory minimum, but this is achieved only by assuming plentiful "future profits". Remove the future profits and Britannic is below the FSA minimum.

The deterioration is all the more remarkable as Britannic was once deemed so financially strong that regulators allowed the company to raid the life fund for surplus orphan assets. The sheer financial strength of the fund seems perversely to have been part of its undoing. As recently as 2001, the fund had 72 per cent of its assets invested in equities. The strength of the fund was used not just to maintain an overweight position in equities, which with the benefit of hindsight was a big mistake, but also to make acquisitions, including that of Britannic Asset Management. That business is now judged to be worth £50m less than the company paid for it.

Having passed the annual bonus, the company has at least had the decency to make shareholders share in the pain. The final dividend and this year's interim go too. Take the bonus and the dividends together, and the group saves itself nearly £300m of capital. All the same, it's not hard to see why no one wanted to buy the company when it put itself up for sale last year. Now stripped of its direct selling force, no IFA is going to recommend Britannic, so how's the company going to keep going at all?

The only person left smiling must be Danny O'Neill, the former chief executive who famously resigned last year, after just two months in the job, to spend more time with his triplets. With the shares off 50 per cent after yesterday's shocker, he's well out of it.

Tax cutting US

It was the economy, stupid, that cost George Bush senior his presidency. His son, George W, does not intend to make the same mistake. If weekend reports are to be believed, he'll be announcing a tax cutting programme in today's long scheduled speech to the Economic Club of Chicago which, at $600bn over 10 years, is double the size initially expected. It sounds huge, but just to put the big number in context, it equates to only 0.6 per cent of US GDP on an annualised basis. That's not as big, for instance, as the fiscal stimulus being given to the UK economy. There is, none the less, a crucial difference. The UK stimulus is being achieved through higher public spending. There's no tax cutting in the UK, rather the reverse in fact.

The new Bush tax cuts (they follow another giant package already enacted) are of as much interest for the areas of taxation they target as whether they work or not in reviving the flagging US economy. More than half the "giveaway" will come in the form of the abolition of tax on dividends. This is a long cherished dream among right-wing tax reformers in the US, the intellectual justification being that people should not be taxed twice on their income, once for the money they earn and then all over again on the money they save out of earned income.

Mr Bush doesn't much worry about the inequality of the measure, which plainly benefits the better off more than the poor. His justification is that he is targeting the part of the economy that needs to be stimulated, the wealth generating bit.

Will it work? It's certainly a bold initiative. No one could accuse Mr Bush of ducking the free-market radicalism for which he was elected (or not, depending on your view of the election result). There are some negatives. One effect would be to increase the pressure on companies to pay ever larger dividends, reversing the trend of the last 10 or more years. That might not necessarily be a good thing. Companies might find themselves being run for cash, and business investment would suffer.

But more likely is that the abolition of tax on dividends would increase the attractions of the US as a place both to invest and for business to locate. It scarcely needs saying that what is being proposed in the US is the mirror image of what's happened in the UK, where the institutional tax break on dividends was removed six years ago, pole-axing our pensions industry in the process.

As to the wider macroeconomic impact of the tax cutting programme, I'm not so sure. The president thinks he can part finance tax cuts by freezing domestic spending. And pigs might fly. At a time when military spending is going through the roof and the federal system is under growing pressure to bail out bankrupt states, it would require draconian cuts in social programmes to balance the books. With rising unemployment, that may not be politically feasible. Mrs Thatcher managed to reduce public spending as a proportion of GDP, but she never succeeded in halting its growth altogether.

Mr Bush thinks the tax cuts will eventually prove self financing. The stock market gets a shot in the arm, investors and business begin to feel more confident, the economy starts to grow again and, hey presto, the tax take begins to rise again. We'll see. In the meantime, there's the problem of a growing budget deficit to finance, the effect of which will be to drive up long-term interest rates, and eventually short-term ones too. That's not so helpful to business, or anyone else for that matter.

BHP Billiton

BHP Billiton was always a curious animal – a dual-listed company with quotes in London and Melbourne and a chief executive with his heart in South Africa. Furthermore, the two companies that came together to create the world's biggest mining finance house were so different in culture that a bust-up was inevitable sooner or later. On the one hand, we had the ultra-conservative BHP, a stalwart of the Australian industrial scene with 118 years of history behind it. On the other, there was Billiton, the aggressive young interloper from Johannesburg which had already shown its mettle by switching its primary listing to London with the specific intention of boosting its share price in anticipation of the merger to come.

When Billiton's Brian Gilbertson eased BHP's Paul Andersen out of the chief executive's seat after just a year, it seemed that the South Africans were going to emerge on top. Just six months later, the forces of conservatism have re-asserted themselves and Mr Gilbertson has resigned to be replaced by a BHP man, Chip Goodyear. The company's Australian chairman blames "irreconcilable differences" between Mr Gilbertson and the rest of the board. In the absence of a proper explanation, the market has been left to surmise that the deal-making Mr Gilbertson was rather keener on growth through acquisition than his Aussie counterparts.

Having already bent the rules once to allow Mr Gilbertson to cash in his £4m of share options when the merger first took place, BHP faces another corporate governance test. Let's hope that BHP doesn't flunk it. Technically, since he jumped rather than being pushed, Mr Gilbertson is only due a year's money plus whatever he can get out of BHP in deferred bonuses and performance shares. But if his lawyers can argue that his contract was in effect terminated, he could be in line for the full monty, which tots up to £4.5m. Why look underground for gold when there's so much of it lying around on the surface?

jeremy.warner@independent.co.uk