Why we should be celebrating the strong pound

Why the Government shouldn't do anything about the pound even if it could, and the trouble with Hanson's accounts
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SHOULD or could the Government do anything about the strong pound? The first myth that needs to be exploded is that the pound is strong at all. Actually, it's not; by historic standards, it is weak. Only since Britain's ignominious exit from the European Exchange Rate Mechanism in September 1992 has it been consistently weaker. For much of the 1980s, it was stronger than it is now against the German mark. Go back as far as 1970, when each pound bought you nine D-marks, and you would have been thought mad to suggest that by 1998 it could be as low as three.

Still, by recent standards, the pound is undoubtedly high, almost 50 per cent stronger against the mark than its low point back in 1995. And given how much of Britain's economic revival post our exit from the ERM has been attributed to the pound's subsequent devaluation, that's plainly cause for concern of some sort.

All this week, the Commons Treasury Select Committee has been grilling economists and Treasury officials over the strong pound. MPs, Tory and Labour alike, are becoming increasingly fretful. It's destroying our manufacturing industry, it's undermining our exporters, something must be done, is the general refrain.

Even if these things were true, which is not in the least bit certain, it is not clear the Government could do anything. Control of monetary policy has been placed with the newly independent Bank of England. The only way Gordon Brown, the Chancellor, could directly persuade the Bank to reduce interest rates, thereby taking the pressure off the pound, is by significantly raising the ceiling on his inflation target. No one wants that, do they?

What about that old chestnut, much beloved of amateur economists, that the Chancellor should be cooling the economy by being tougher fiscally, removing the need for any further monetary tightening? The Chancellor could certainly have done more in the Budget. If he's going to abolish tax relief on mortgages, for instance, now would have been the time to do it. Nobody would have been unduly surprised or upset by it. But actually, there is already a very significant fiscal tightening in progress and it is not clear that to have been tougher still would have pushed the pound lower. The reality could easily have been the reverse.

This needs explaining. When the pound first started climbing, I put it all down to the interest rate cycle. It was a temporary, cyclical thing, I said, no more than a blip in sterling's historic decline. I was wrong about this. Interest rates are a part of the story, but there has also been a sea change in the attitude of international capital, which is being attracted to these shores by the perceived health and strength of our economy. If Gordon Brown had been tougher still, that perception might have been strengthened further. Far from falling, the pound would have strengthened even more.

So it's not clear that the Chancellor could do anything. Nor in my view should he. The evidence of recession in manufacturing industry is at best ambivalent. Exchange rates are obviously an important factor in determining international competitiveness, but productivity, investment and costs are the key. Some of the highest pay awards of the last year have been in manufacturing. Not much sign of pain there.

Meanwhile some other areas of the economy, notably services, stock and property values, are experiencing near boom conditions. Right now, the UK economy needs lower interest rates like a hole in the head. Nor is apparent that we need a lower pound. If the strong pound is a reflection of the underlying strength of our economy, then we should all feel glad about it.

IT WAS Robert Hanson's near pounds 500,000 payoff that grabbed the headlines when Hanson PLC published its annual report and accounts recently, and justifiably so. What Mr Hanson did to justify his salary while there was hard enough to understand, let alone how he came to deserve such a splendid going away present.

But the accounts are worth close scrutiny for another reason too. This is not because they are illuminating in the normal sense of the word. Far from it. It is because despite the demerger of the old Hanson conglomerate into four "focused", easy to understand parts, of which this building materials group is one, the accounts remain a masterpiece of obfuscation and leading edge creativity. Even with the mind of an Einstein, you'd be hard pressed to penetrate these accounts.

Another of Lord Hanson's hallmarks lives on in his offspring too. For reasons not explained, the accounts continue to be audited by the Hull branch of Ernst & Young. I've got nothing against Hull and if accountants are to be judged by their ability to confuse, then Hull plainly has some highly accomplished members of the profession. All the same, it seems a little perplexing for an international business with annual sales of nearly pounds 3bn.

However, even a mind as unsophisticated as mine is capable of seeing through some of the techniques used to bolster the balance sheet. Net current assets, a key indicator for bankers and investment analysts in assessing solvency, are boosted by pounds 233m to pounds 986.2m by the reallocation of tax from current to deferred liabilities. Not very clever really, but it does the trick. The previous year Hanson injected the drug intravenously by taking pounds 166m of tax provisioning straight into the profit and loss account. Presumably that pounds 233m, once it has spent a year or two in the purgatory of deferred liabilities, will be heading the same way.

These handy, not so little, provisions, seem to be a leftover from the giant tax avoidance (sorry, planning) exercises Hanson used to run through Panama and other offshore centres during the glory years of the great conglomerate. The tax would have been provided for in the balance sheet, just in case. As time passes and it becomes clear there is little possibility of the taxman being able to claim his own, it can be fed back into profits.

If Hanson's accounts are sufficiently clear to allow sight of a wheeze like this, it is only possible to speculate on what else lies hidden beneath the surface. Professor Sir David Tweedie at the Accounting Standards Board has made commendable progress in harmonising accounting practice and limiting the opportunity for window dressing of accounts after the abuses of the 1980s, but for most of us the inner workings of the balance sheet and p&l remain as mysterious and impenetrable as ever. Oh, and another thing about Hanson. It's still only paying 17.5 per cent tax on its profits, little more than half the UK's official rate which, as Gordon Brown keeps telling us, is now the lowest in the developed world. Nice to see that some things never change.

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