Brown skates on thinner ice

THE City is unconvinced by the Chancellor's public spending statement. One cannot but admire the boldness of his vision for the NHS, education and international development.

But the bottom line is that he is having to engage in creative accounting to increase the size of the state without breaching the fiscal rules he created.

The biggest credibility gap is over execution. There can be no doubt that the £ 21.8bn of efficiency gains uncovered by Sir Peter Gershon and turned into firm commitments by Brown are there to be had.

But turning the great tanker which is the ship of state around is tricky. So far the government's work with information technology has been a series of disasters, from the passport office to tax credits.

The experience of most commercial organisations is that when hi-tech systems are being put in place, costs rise because of the need to retrain staff before the savings can be implemented. We also have seen in companies such as Sainsbury - which invested heavily in IT and logistics - that they rarely deliver as expected.

The second lacuna is the sale of public assets. Brown is right to recognise that public services do not have to be run from grand buildings in Whitehall. Indeed, the Treasury is freeing up the front end of its own offices on Great George Street to the private sector.

So the £30bn sell-off of public assets is a reality. But unlike the Thatcherite sales of British Airways and the like - which permanently enriched the exchequer by generating tax revenues - selling property increases the ongoing costs of government, since new properties to accommodate public servants will have to be leased.

Brown has begun the process of easing back on the size of spending increases in many areas. As the IMF and others have remarked, this is sensible in terms of indigestion.

Indeed, there must be a real question as to whether it is really worth pumping a 7.2% spending increase into the NHS when basic management problems, such as cleanliness and the superbugs, remain unresolved.

Efficiency gains and asset sales will be necessary for Brown to keep within his fiscal rules over the next cycle. Otherwise he (or his successors) will have to use higher taxation to keep the public finances in good nick.

The Chancellor also faces a potential economic threat. The consumer price index ticked up to 1.6% in May, still well below the Bank of England's 2% target.

But it is interesting to note that the old retail prices index (RPI), which includes an element for housing and mortgages, is now rising at 3%, its highest rate since July 2003. Fuel price rises are still coming through and the Monetary Policy Committee has some way to go with its tightening.

One of the purposes of higher interest rates is to slow consumption and the housing market and prevent overheating.

At present the economy is expanding at a good clip, but subsidence in the property market could jolt growth and tax revenues. That, too, would undermine Brown's plans.

In the spending review the Chancellor sought to build in some caution by lowering the rates of increase. But with each of his successive Commons statements, the fiscal foundations look less robust.

Movie magic

THE big mystery about Marks & Spencer is why the share price is so lacklustre. It is extraordinary to think that there is a cash bid from Philip Green on the table worth 400p yet the company's shares sit at 359 1/2p, a 10% discount to the offer price.

There are a couple of explanations for this. By refusing Green due diligence, the M&S board has in effect raised questions as to whether the 400p would still be on offer if Green were to be given access to the management accounts and the pension fund.

These are hardball tactics from chairman Paul Myners and the board, but could rebound if the shares sink when Green's offer lapses.

The share price weakness does not suggest that investors have much faith in the Rose strategy either. The bull point is the financial services sale, on a price earnings ratio of 30 times, with a retained share in profits. But everything else is on trust.

Myners and his board will have to listen carefully at today's annual general meeting when small shareholders representing 20% of the equity will have their say.

It would be great if Green, bearing his wife Tina's proxy, were to turn up and make his case for some retailing magic.

This would be an echo of Gordon Gekko's 'Greed is Good' speech in the film Wall Street. But maybe it only happens in the movies.