Labour's track record slips

THE opprobrium heaped on Stephen Byers since he grabbed back Railtrack from its management, shareholders and bondholders has made him the City's great hate figure in government.

He does not make matters any easier by portraying shareholders as a bunch of fat cats, when they are, in fact, all of us who have collective investments.

Byers is dangerous to Labour, not because he exposes the old socialist thinking, but because he betrays a lack of understanding of how finance works.

One of the outcomes of the Railtrack fiasco - unless would-be bidder WestLB comes to the rescue - is that the successor company is certain to pay more for its borrowings. Initially, it looked as if this financing cost would be 3% above the cost of gilts of the same maturity, as against the 1.31% premium paid by old Railtrack. With Byers now aiming for a double-B rating, the likely cost would be 2.35% or 1% more than previously. This is a point which the Shareholders Action Group, representing Railtrack's bigger investors, will put to Byers today

Byers is not alone in misreading the financial impact of his deeds. One of Gordon Brown's original stealth taxes was the decision to abolish the rebate on advanced corporation tax to pension funds. At that time, final salary pension funds were riding high on the bull market, an incipient IT surge and higher levels of inflation. Brown's advisers advanced the notion that the big surpluses in company pension funds meant that the £5bn hit could easily be absorbed.

What was true in 1997 is no longer the case. Equities have fallen, the IT bubble has burst and inflation is being held back by the Bank of England and a strong pound. The loss of the corporation tax rebate has hit investment managers hard, leading Boots (and others) to switch to gilts.

Such moves across the industry would both deflate equity prices longer term and expose future pensioners to real pain should inflation return. Labour's cleverness has backfired by undermining occupational pensions.

A third area where Labour's over-enthusiasm for raising revenue has seriously troubled both investors and the nation's technological advance is 3G licences. At the time of the auction, organised for Labour by NM Rothschild, the £22.5bn raised looked crazy to everyone, except those such as BT and Vodafone which paid up.

Brown rubbed his hands as the windfall allowed him to pay back government debt and insulate the Treasury from the present slowdown. Those close to the Chancellor say that it is one of the reasons that he can promise not to raise taxes in his pre-Budget report.

But this has been a terrible blow to investors in telecoms, who watched aghast as great chunks of licence investment had to be written down. Contrast this with France and India where fear that managements would overpay for 3G led governments to abandon the auction process.

The result is that Vodafone and mmO2 will be at a competitive disadvantage in the roll out of 3G systems, and BT and Vodafone shareholders have been taxed in advance on gains that may never be realised.

Labour's failure better to understand the market and the financial consequences of its action is breeding distrust in the City. This will not be corrected by any number of Downing Street cocktail receptions for big business.

Recession relief
THE consensus that Britain can avoid a recession is building. Despite a rise in unemployment last month, both Bank of England deputy governor Mervyn King and CBI chief Digby Jones indicated that recession can be avoided.

King noted that the chances of recession were 'very small' and quantified the probability as 'one in 10.' This compares with his 1998 assessment, during the Asian crisis, of 'one in six'. In reckoning such a low risk this time, King was referring to a full year of negative growth, rather than the US definition of two successive quarters.

As for inflation, King made it clear than even after last week's 0.5% cut in interest rates to 4% he sees no real likelihood on a twoyear horizon that the inflation target of 2.5% will be breached.

The risk raised and discussed by the Monetary Policy Committee is the fall in the exchange rate, with members judging that 'there is more of a downside risk than an upside one' given the worsening trade balance. But if we really believe that the UK economy will grow faster than its Group of Seven counterparts in the months ahead, then the likelihood is that sterling will strengthen. Currency markets like strong economies.