View from City Road: A sigh of relief as spectres fail to materialise

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The Independent Online
The equity market, which rose by more than 20 points during the Chancellor's speech, will be marked sharply higher this morning. Not for anything the Chancellor did but for what he did not do.

Fund managers had been worried that consumers were about to be hit by even heavier taxes than were already in the pipeline to rein back the public sector borrowing requirement.

Even worse was the threat that the pensions industry's tax privileges were to be stripped away, costing the industry about pounds 3bn in the case of lost tax credits and depressing equity prices via lower cash flows and pension fund deficits.

In the event, the spectre of extending VAT to previously exempt goods proved to be just that. And the pension funds emerged unscathed. But few doubt that if government finances go horribly wrong, the Chancellor will look again.

The boost to shares, which may be worth 30 points on the FT-SE 100 when trading begins, will come indirectly from a buoyant gilt market. By skilful use of mirrors - lower inflation than expected and a pounds 3.5bn raid on the contingency reserve - the Chancellor has given a solid leg-up to the gilt market with an additional pounds 7bn bonus from under-funding.

A cut in public cash spending totals alone has produced the desired substantial cut in the PSBR from pounds 50bn to pounds 38bn next year without threatening growth, while offering the prospect of lower interest rates.

It all seems too good to be true and there is a clear risk that spending will not be held as expected when the contingency reserve has been depleted.

The bad specific news, such as it was, was by no means serious. A tax on insurance premiums is a classic exploitation of inelastic demand - we all must insure our cars and would be mad not to insure our homes and contents. Insurance company shares will shrug off the news.

Similarly, the impact on British Airways, although marked down 8p to 420p yesterday, and BAA of the new pounds 5- pounds 10 departure tax will probably be small in terms of its effect on traffic volumes.

Both shares have been strong outperformers this year as the tide of passenger traffic has begun to flow strongly in their favour.

The new tax may not dent this demand but it could hit the tentative recovery in yields at BA by keeping businessmen in economy class and out of the premium seats.

At the same time, a family having to fork out pounds 20 or pounds 25 to leave Heathrow or Gatwick may give BAA's retail outlets a miss and this will be unhelpful at the margin. Alternatively, airlines may try to pass on the tax to BAA.

There was little cheer for builders. Cuts in road building and local authority repair and maintenance programmes may not be offset by opportunities in other public-private sector projects. Housebuilders such as Wimpey, Tarmac and Barratt Developments will also not be happy to see the rate of relief on mortgage interest lowered by another 5 points to 15 per cent.

On the positive side, corporate sector finances will stand to benefit by pounds 130m to pounds 300m by the net effect of tougher sick-pay rules and lower National Insurance contributions, the last favouring the likes of Rentokil, Forte and the supermarkets, all employers of low-wage staff.

The decision to press ahead with the Docklands Light Railway extension south of the Thames and the construction of the West Coast railway line is potentially good news for GEC and BTR.

Retailers such as Marks and Spencer and J Sainsbury had been steeling themselves for VAT on food and clothing, and their shares will rise in relief. Newspaper publishers also breathed again and Mirror Group Newspapers was notably strong in late trading.

The biggest beneficiary of the decision to freeze excise duties on beer and spirits is undoubtedly Guinness, the UK's biggest distiller alongside its beer production.

But it is doubtful whether stable prices in pubs and off-licences will do a great deal to slow the 2- 3 per cent a year fall in beer consumption. Nor will it do much to halt the growth of cross-Channel purchasing of beer, which is currently exercising the brewers, particularly those with big exposures in the South-east, such as Allied- Lyons and Whitbread.

Extra funds made available to local authorities under the Community Care legislation will be welcome news to the fledgling nursing home sector led by Takare and Westminster Health Care. Fears had been expressed that social services departments would run out of money to fund patients at privately owned homes.