View from City Road: Dorrell jumps in where bankers fear to tread

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The Independent Online
Sometimes it is hard to tell who distrusts the City the most - the Labour Party or the typical medium-sized British manufacturer.

It is therefore puzzling that it has taken the City so long to wake up to the implications of an inquiry into savings and the financing of industry launched last year by Stephen Dorrell, that scion of a family of industrial clothing and overalls manufacturers in feet-on-the-ground Worcester.

Mr Dorrell also happens to be Financial Secretary to the Treasury, and works under the orders of Kenneth Clarke, who wants the Government to be more friendly to businessmen who make things.

Work on the 1994 Budget begins in early summer, a couple of months away. Imagine the danger: before the chaps in the Square Mile have got their lobbying act together, there could be a blueprint in the Treasury for all sorts of new tax wheezes to divert funds to manufacturing, at the expense of banks, pensions funds and insurance companies.

Remember last year's 2.5 per cent insurance premium tax? We may not have seen anything yet.

Anxious that the battle will go by default if institutions do not fight back, Paddy Linaker, managing director of M&G, the unit trust group, yesterday urged the City to get its wagons in a circle before it's too late.

Mr Dorrell has been asking a lot of tough questions. Why is it so difficult to raise capital for hi-tech start-ups? Why are relationships between finance and industry so poor? How come manufacturing has shrunk as a proportion of the economy? Why are dividends so high compared with other countries, draining industry of cash?

Mr Linaker, a noted enthusiast for high dividends, has an answer to the last question. Yes, dividends are high, but it is six of one and half a dozen of the other. In countries where bank lending is a larger proportion of business financing, banks insist on very high cash surpluses inside companies, to make doubly sure they can cover their interest. The effect on investment is the same.

The argument has some force. As a report this week by BZW and Dun & Bradstreet found, only 33 per cent of British companies borrow from banks at all. So importing German banking methods is not going to save the British economy. As usual, the Government is barking up the wrong tree.