Brown hands reins to King

GORDON Brown has largely left the economy on autopilot for the next year. After the hand-outs to pensioners and other minor adjustments, the net effect is a giveaway of £725m.

Putting aside the debate in the City about whether the Chancellor will break his own 'golden rule', much of the attention in the coming months will be on monetary rather than fiscal policy.

Having effectively ruled out tax increases or real public spending cuts before the next election, Brown has in effect passed responsibility for steering the economy to the Bank of England.

Mervyn King and the Monetary Policy Committee (MPC) have a difficult task. Much of Brown's Budget policy depends on healthy economic growth in the year ahead.

But as we learnt in Madrid last week and in Baghdad last night, the potential for terrorists to disrupt global recovery and Britain's robust expansion is manifest. If that happens, the wheels will come off Brown's Budget projections.

There are strong hints of what is to come from the MPC in its March minutes. For more than a year now the Governor has been forecasting that house price rises will flatten over a two-year time horizon. But three months into 2003 it is not happening. Indeed, by any measure house prices and credit expansion are jet-fuelled.

Deputy governor Sir Andrew Large, who runs the financial stability wing of the Bank, is the person to watch. It is known that he fears that house price inflation and the rapid accumulation of consumer debt are heading into unknown territory.

The MPC minutes note the risk that this boom could become 'unsustainable' and instead of a soft landing there could be 'an abrupt adjustment'.

The Bank might well launch another pre-emptive interest rate strike. The two quarter-point increases in rates in November and February, taking us to 4%, have had no impact at all. Maybe the Bank should consider some shock treatment such as a halfpoint hike in May, when it is widely expected to move again.

An early jolt to the consumer and the housing market could remove the need to push rates up ever higher and faster at a later stage.

Savings neglect

BROWN'S seven-year stint at the Treasury has been wonderful for borrowers, but it has not been a good time for thrift.

Indeed, instead of being encouraged, savers will be taking some further knocks. Those investors putting money into equity ISAs will be hurt by the removal of a large chunk of the tax relief on dividends. The amount of cash you can shelter in an individual savings account will fall from £3,000 to £1,000.

Families who have invested over a lifetime in bricks and mortar, believing they could pass the asset to their offspring through trust arrangements, find themselves thwarted. This is an incentive for them to spend their money on a worldwide cruise rather than make the kind of inter-generational transfers that can assist financial stability.

Still, we should be grateful for small mercies. The biggest change for savers is the new pensions regime, which sweeps away decades of complex tax arrangements and allows individuals to accumulate a pension pot of £1.5m, rising in future years with earnings.

The new deal will give people more flexibility to increase their contributions beyond the present limits in the good years, when they receive bonuses. This is a useful way of sheltering income for retirement.

There will be cries of foul over the £1.5m pension cap from those at the top of the income tree. The National Audit Office indicates that at present there are 10,000 of these at best, although the figures could soar over time.

But for the vast number of people in private sector employment, this is an opportunity to save more flexibly. Now all that people need is fund managers who know how to make competent investment decisions. As we learned in the bear market, such managers are few and far between.

Super seizure

LABOUR'S natural response to regulatory agencies has been to create a series of super watchdogs including the Financial Services Authority, Ofcom for media and Ofgem for power. The net result in most cases has been bigger bureaucracy and swelling budgets.

The latest attempt at amalgamation which will bring together the Inland Revenue and Customs and Excise - something first proposed by Gladstone in 1889 - is designed to save money and lose jobs. But it also blends two different cultures, the gung-ho, seize first and ask questions later at Customs, and that of the supposedly friendly taxman.

Heaven help us all!