Brown gambles on debt

AS Gordon Brown limbers up to deliver his Pre-Budget Report next month he is starting to toss out clues on his strategy. Most important of all to him is keeping growth on an even keel.

This is critical at a time when the Bank of England is tightening policy as part of an effort to constrain rampant household borrowing.

In his CBI address Brown indicated that he would not be rushed into 'cutting spending or raising taxes' at this stage of the economic cycle.

This will mean allowing borrowing to take the strain. City and private forecasts see borrowing rising well above the budget forecast of £27bn, possibly as high as £37bn. Some calculations even suggest that Brown is in danger of breaching his 'golden rule' of only borrowing for investment over the cycle.

So how does he intend to square the circle? Clearly, the Chancellor would be unwise to raise new taxes in the run-up to an election. So he must be partly banking on the recovery in the City to come through to revenues. It is also clear that this year will see the peak of extra cash flowing into the public sector, which is having problems spending it quickly enough.

Next year's White Paper will see the rate of spending increase ratcheted down to levels more consistent with the expansion of growth.

The Monetary Policy Committee will play a part in delivering stability. Inflation came in better than expected in October with the target measure slipping to 2.7%.

This is still enough to justify the Bank raising rates again before we switch to the European harmonised inflation measure (HICP), which at 1.4% is way below the expected new target of 2%.

The transition to that goal could be anything but smooth for Bank governor Mervyn King, who will have quite a bit of explaining to do.

BA deficit

WHO would be an airline executive? It is not all about junkets to the other side of the world. As the nation's oldest carrier, and with a pension scheme dating back to 1948, British Airways is being forced to cut and cut again at a time when costs are still running ahead of revenues.

Some £1.7bn has been taken out of costs since chief executive Rod Eddington began his 'size and shape' exercise but the bumps on the runway are still coming.

The latest is BA's three-year actuarial valuation. This has thrown up deficits in its oldest plan and in its main fund, the New Airways Pension Scheme, which has a £928m black hole.

To meet commitments BA needs to find £225m from January, a considerable sum when it is barely in profit as a result of the disrupted marketplace since September 11, 2001. Flights to Sydney may be full but the Rugby World Cup only comes along every four years.

How is BA coping? It already is putting new employees into a money purchase scheme. But this will not be enough. It is now going to sit down with the unions and see if there are ways in which the workforce can make a greater contribution to getting the funds solvent.

Among the more obvious options are raising the retirement age so that, among other things, glamorous cabin crew aged 50 or over can keep flying. Other possibilities include a rebasing of pensions using a different formula.

Best of all would be a further recovery in share prices. But that may still be a long wait.

Mobile mover

VODAFONE is a cash machine and now it is sharing the returns with shareholders.

The delicious prospect of a 20% rise in dividends and share buybacks sent the group's share price soaring.

It is still busy cleaning up its balance sheet after the spending spree of the late 1990s. Operating profits of £5.7bn are wiped out by goodwill write-offs, leaving a loss of almost £2bn before tax, 14% lower than last time.

Looking ahead, the double-digit growth Vodafone predicts for next year will give way to single digits, and the jury is out on how much extra margin it will recover from the roll-out of third-generation phones.

It also has difficulties in Japan, where it is lagging far behind the market leaders and may not meet targets. Similarly, at some point it will need to put its relationship with its American partner Verizon, in which it is a minority holder, on a more sustainable basis.

It is hard not to admire the way in which Vodafone has gradually turned minority stakes into majorities around the world, making it one of Britain's small group of world-class companies.

Arun Sarin is off to a good start. But there is much still to do.