Labour and employers too cautious for Clarke

COMMENT

Wednesday 13 September 1995 23:02 BST
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Want to guess at the highlights of the Budget speech New Labour's first chancellor would make if Tony Blair wins the election? For the ground rules, at least, look no further than the CBI's submission to Kenneth Clarke. It is solid, middle of the road, responsible stuff, with the emphasis on controlling public spending before any thought of tax giveaways or extra outlays.

The employers would like the government to spend more only to the extent that it does not damage the prospects for keeping interest rates down. What extra resources could be found would go to higher education, transport and export promotion, together with help to small firms and direct fiscal encouragement for investment by industry.

It is not a new departure for the CBI to want interventionist spending in areas critical to the long-term health of industry and to worry about the Treasury doing anything that damages the outlook for interest rates. The employers have never been ones for the simplistic recipes of the Tory right.

But the political framework in which this autumn's submissions are being presented is increasingly disorienting to economists used to the black and white certainties of the 1980s. For a start, the CBI's New Labour Budget is probably too cautious for Kenneth Clarke, whose private joke is said to be that where fiscal stringency is concerned he is to the left of Gordon Brown, the shadow chancellor.

Mr Clarke is perfectly capable of popping some quite radical measures into the Budget, for example by turning family credit into a benefit that does not depend on having children. That would be one way of lessening the poverty trap for those returning to work. However hard he denies it, Mr Clarke must produce something eyecatching for the voters, which will be all the harder to achieve now special measures for the housing market have been put on the back burner.

The CBI wants to cut taxes on alcohol and tobacco, a backward step in health terms. But Budgets are about the economy, not social policy, and it is perfectly possible that with the extent of job losses in these industries a New Labour chancellor as well as an old Tory one would feel obliged to do something for booze and baccy.

Mr Clarke won the argument over rates with Eddie George, governor of the Bank of England, and will not want to throw those political gains away with an over-generous Budget. Caution over taxes and spending is a cross party theme.

The Newmarch legacy lives on

Mick Newmarch has gone, but his legacy lives on at the Pru. If it had not been for a bitterly antagonistic relationship with the financial regulators, he would still be there to bask in the City's praise for a creditable achievement in coming through an extremely difficult time for the industry with only a modest amount of damage. Under his leadership the mighty Pru had a reputation for belligerence, standing full-square against self- regulation, calling for the state to step in instead. There was also the embarrassing matter of the inquiry by the Stock Exchange into the timing of the exercise of Mr Newmarch's share options.

Now not a cheep is heard out of Peter Davis, his successor, about regulatory issues. It is clear that however much good Mr Newmarch did for the Pru, his hard line on regulation was counterproductive, particularly at the level of the salesforce, which found it tougher to sell to customers whenever the company hit the headlines.

The half year figures were not in fact as good as they looked. Despite a 20 per cent rise in pre-tax profits to pounds 335m, half of that came from the disposal of the company's Canadian life and pensions business. Life and pensions annual premiums fell by 11 per cent worldwide to pounds 216m, while single premiums dropped by 10 per cent to pounds 2.4bn. UK savings and protection business produced profits of pounds 130m, but this was down slightly on the same period a year earlier. Regular and single-premium business has also been badly affected by new rules on product disclosure and, of course, by lack of public confidence in the industry after all the recent scandals.

Nevertheless, Mr Davis is confident that the Pru has got its overall strategy right. By the end of last year, the markets had begun to ignore the Pru's message and concentrate on the messenger. Boring it may be, but there is something to be said for a slightly lower profile chief executive.

Platform for reform

Anything with a name as soporific as the Centre for the Study of Regulated Industries perhaps deserves to be ignored. It would, however, be a mistake to do so, for the CSRI provides one of the very few public forums for informed debate on how to reform Britain's nascent system for regulating privatised utilities. To judge by speakers at a CSRI seminar yesterday, there is now a degree of consensus even among those that make up this burgeoning industry - the regulated and the regulators - that reform is both inevitable and necessary. The question is what, and how much.

As always, it is easy to identify the problems, less easy to find a solution. The regulation of utilities is intimately bound up with their privatisation, which most in commerce would accept has yielded enormous benefits. Get reform wrong and you undermine privatisation too.

None the less,the present system is widely perceived to have failed. In part what is wrong is a simple problem of public relations, corrected relatively painlessly by quicker-thinking regulation, greater transparency, better presentation of the argument and more public accountability. Plainly it goes beyond that, however, to whether the whole basis of tariff regulation in Britain - price capping - is appropriate. The reason the system is seen to have failed is that in nearly all cases the rate of return achieved by the utility has been far greater than that assumed at the time of privatisation, and the benefit of this is seen to have gone almost entirely to shareholders.

Like most good ideas, many of the suggested remedies for this asymmetry of benefit - such as profit sharing and sliding-scale dividend controls - are not new. Even so, they are now winning support from some quite surprising sources. One of yesterday's speakers, Harry Moulson, gave wholehearted support to the idea of profit sharing. He is managing director of Transco, British Gas's pipeline business.

His reasons for doing so, however, may come as something of a shock to customers, for he believes price cap regulation has become so demanding that it may be loss sharing that customers can expect to participate in. Turning the argument round, Ian Byatt, the water industry regulator, said the reason he was against profit sharing was that it removed some of the incentive to efficiency of the price capping regime. Ergo, the customer ultimately ends up paying more. That means he may end up sharing in the company's failure to achieve assumed rates of return, rather than sharing in profits. Not quite so cut and dried, is it, this debate.

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