Outlook: Lord Browne made to pay for his first ever disappointment

Not so golden rule

It was a humbled Lord Browne of Madingley who appeared before analysts in the City yesterday to admit that forecast oil and gas production for this year at BP is being cut for the third time in eight weeks. What's more, the company is reviewing its long-term goal for production increases, third-quarter net profits are down 13 per cent, margins are nose diving and the company's return on capital has slumped from 22 per cent last year to just 13 per cent.

John Browne, invariably voted in surveys as Britain's most admired chief executive, doesn't do disappointment, but this was disappointment big time. He may have missed a forecast or two before, but the City struggles to recall it. The Sun King suddenly begins to look vulnerable and human after all. The shares duly slumped more than 7 per cent, taking them to a new four-year low.

To say that Lord Browne is contrite hardly does justice to the degree of humility he plainly feels. He could explain the cuts in production growth, which were mainly down to hurricane damage in the Gulf of Mexico, but he wasn't going to use the explanations as an excuse. The failure was entirely down to BP, even if it may have been a little foolish of the company to have nailed itself to the cross of production growth forecasts in the first place. It might still be possible to meet the production forecasts, Lord Browne insists, but it would cost a lot of money to do so and it isn't clear this is a sensible use of resources. Past goals were overly ambitious, and the company lacked the headroom to fulfil them.

It is the way of such trading letdowns, after a long run of corporate success, that they are generally a harbinger of much worse to come. Even the best chief executives will eventually run out of luck, energy and ideas and their organisations will begin to rot beneath them. Is BP a case in point? Is this a company that's had its glory years, and is now set on a long period of slow decline? The temptation is to say yes. The big, cost-cutting mergers are done. There may be scope for the odd bolt-on acquisition but the competition authorities would never allow another big consolidation. To stumble like this is meanwhile strongly indicative of a loss of momentum and drive.

On the other hand, John Browne is John Browne and it is in the nature of the man that he will not rest until he's made up for yesterday's disappointments. BP has its own measure of underlying performance, sometimes referred to as a "self help" target and generally accepted as a reasonable yardstick in the stock market. On this measure, which adjusts for outside factors such as changes in the oil price, BP is still on target to achieve double-digit earnings growth this year.

Whether it will also achieve the higher goal of $1.4bn in earnings growth is more open to question, but Lord Browne will be moving hell and high water to get there. Executive pay and bonuses will be slashed, costs will be cut to the bone and everything else will be turned upside down to ensure the target it is met.

We shouldn't be writing Lord Browne's obituary quite yet. As for the share price, the stock has sunk so low that it now yields more than is available on most deposit accounts. For a class company with excellent long-term prospects, that's too low.

Not so golden rule

Angrier and angrier grows the debate about the state of the public finances. The Chancellor, Gordon Brown, is spitting tacks over two reports which suggested that the Government's own "golden rule" for governing tax and spend is about to be breached, and he is said to be promising a robust defence in his pre-Budget statement next month.

The Chancellor's handling of the economy is Labour's only big domestic success story to date, the more so because Labour governments traditionally make such a hash of things. A major part of that success is Mr Brown's apparently prudent approach to the public finances. Labour is embarked on some of the biggest increases in public spending ever seen in peace time, but Mr Brown's pitch is very much that this is affordable spending, that he's earned the right to spend. The idea that it's all about to go to hell in a handcart is not something he wants to hear.

The Ernst & Young Item Club report, suggesting there is a 50 per cent chance of a breach of the golden rule this financial year, is one thing, but for the highly respected National Institute of Economic and Social Research to suggest that the Government might exceed its deficit forecast by £20bn by 2006/7, putting the Chancellor in breach not just of the golden rule, but the eurozone growth and stability pact rules too, and just about any other rule you care to devise, is quite another and plainly rankles.

So who's right and who's wrong? The short answer is that nobody really knows. Attempting to forecast the difference between two such huge numbers, tax and spending, can never be exact, and you only know for sure whether the rules have been breached after the event.

Only one thing seems clear. The golden rule is a quite slippery beast. To be fully credible, it could do with better definition and some independent adjudication. The golden rule holds that it's OK to run budget deficits provided that the budget is balanced over the lifetime of the economic cycle.

All well and good, except that whether the golden rule is met or not obviously depends on how long the economic cycle is defined to be. Since the Government decides, there is the potential continually to fudge the rule. The Item Club points to the Treasury's own "cyclically adjusted" figures to suggest that the Government might be judged to have breached the rule if it slipped into deficit even for just one year on the cyclically adjusted basis.

The Government doesn't accept that definition. Instead, it points to its own assessment that the cycle began in 1999, since when about £50bn of surpluses have been banked. That gives a lot of headroom for borrowing over the next two to three years. What's more, if the previous cycle, defined as 1997-99, is factored in, then there is an even larger piggy bank of surpluses to offset any future deficits. Hoorah!

To those not fully immersed in the intricacies of how much governments should be allowed to spend, all these arguments might seem like so much mumbo jumbo. There are none the less important issues at stake here. If governments are allowed to fudge the rules, then there is no point in having them. The Government is already spending more than is wise in a free market economy. In its desperation to improve public services, it risks crowding out much private sector investment by over taxing and over borrowing.

The Chancellor would like to see his own system for governing the public finances adopted by the eurozone in place of the now discredited growth and stability pact, but how pure can he claim to be? The golden rule is a perfectly sensible way of running the public finances, but it needs to be defined and independently adjudicated.

Nor does it matter very much if the rules are occasionally breached, provided there is a system in place to force the Chancellor to address such breaches when they occur. Much better that, than the Chancellor pledging to set policy to meet the rules and then fudging them when it doesn't. The model should be the Chancellor's own creation – the Bank of England's Monetary Policy Committee, which is required to keep inflation at between 1.5 and 3.5 per cent.

If inflation falls outside the range, then the MPC is not dismissed, but it is required formally to explain how the problem might be addressed. As for the independent assessment, the National Audit Office wouldn't have the expertise, while the Bank of England might find itself compromised by having constantly to tick the Government off. So how about the National Institute? OK, OK, only a thought.

jeremy.warner@independent.co.uk