City & Business: Check Brown out for substance, not spin

CHECKLIST for Chancellor Gordon Brown's Budget speech.

q Is the Budget Brown unveils neutral in setting government incomings and outgoings in the coming fiscal year, or does the Chancellor finesse Labour's election no-tax pledge by making a distinction between income tax and other forms of tax?

q Will Brown use the word "radical" less than three, between five and 10, or more than 10 times?

q Will he institute a 10 per cent tax band for the first pounds 2,000 of taxable income?

q In July, Brown cut corporation tax by 2 points to 31 per cent and tax on small and medium sized businesses by 2 points to 21 per cent backdated to April 1997. Will there be a rollback of these cuts or a further evolution of them?

q In July, Brown allocated pounds 1.2bn from reserves for the NHS in 1998/99, with health spending to rise 2.25 percent in real terms. What will he do with the NHS this time round?

q In his speech to the last Labour Party conference before last May's election, Tony Blair pledged to build Britain into a "skill superpower of the world". What steps will the Chancellor take in his Budget toward this goal?

q To encourage investment will Brown reduce capital gains tax for assets held more than 10 years to nil?

q Will there be an increase to 50 per cent in inheritance tax on sums over pounds 2m?

q Will there be higher taxes on company cars to supplement public transport expenditure?

q The buzz is that Brown's Budget will be the most ambitious since Nigel Lawson's tax reforming budget of a decade ago, when the basic income tax rate was cut to 25 per cent and all higher rates were consolidated into a single 40 per cent band. How close will Brown come to living up to this buzz?

q Earlier in the month, in a speech to the Scottish Labour party conference, the Chancellor committed the Government to a target of full employment. What measures will he announce toward achieving this goal, and what benchmarks will he detail that allow a judgment to be made on his success or failure in meeting this target?

q Will mortgage tax relief go?

q What steps will he take to reduce the chilling effect of the strong pound?

q Will the Chancellor, as leaks to selected reporters suggest, impose a three-year spending straitjacket on his Cabinet colleagues?

q Will he set a target for reducing interest payments on the national debt, which now stand at pounds 25bn a year?

q Will he outline his plans to help out-of-work parents into employment in language that can be understood by anyone with less than a university first?

q At the end of his speech, will those listening have a better perspective on what difference his Budget will make to the country?

q Will his speech be mainly spin or will it point the way toward a genuine third way between the stultifying state capitalism of Germany and France and the ruthless capitalism of the US?

q What innovations will Brown's Budget offer to nudge up the long-term rate of annual economic growth?

q What steps will Brown take to curb the use of offshore centres to avoid tax?

q Will he refer to Paymaster General Geoffrey Robinson's tax affairs?

q How specific will Brown be about his plans to increase the aggregate number of decently paying jobs in the country?

Derivative to disasters

THE International Monetary Fund's strained diplomatic efforts to help Indonesia's President Suharto save himself from himself are poignant. The IMF's old-fashioned notion is that if it can get Suharto to abide by the conditions attached to the IMF's loan he has agreed to, the country's people will be better off and so will the international financial system.

The problem is that despite his cunning, charm, raw intelligence, and mastery of international finance, IMF managing director Michel Camdessus is whistling in the dark. Restructuring Indonesia's bank debt might have guaranteed financial safety a decade ago. These days, such debt is not the only - or even the biggest - kind of financial exposure. A far bigger exposure, and therefore bigger risk, almost certainly exists in the derivatives markets. Remember Nick Leeson's 8888 error account at Barings.

No-one knows how big these exposures actually are but we can be sure that they are enormous. An impressive and readable new book, Apocalypse Roulette (Macmillan, pounds 20), by Richard Thomson, a former Independent on Sunday colleague, charts the history of derivatives over the last 2,000 years, if you can believe it, and concludes that where there is a speculative boom and bust derivatives are more often than not at the centre of things. Asia was nothing if not a speculative boom in the early 1990s that has turned into a bust.

The book argues that bankers and regulators have still not learnt how to control these new markets - for futures, options, and other "derivatives" of the stock, bond, and currency markets. It builds a plausible and frightening scenario in which a derivatives-related problem in a single bank can be so quickly transferred to other institutions and markets these days that, in the wrong circumstances, global financial meltdown could begin before anybody is able to stop it.

The derivatives problem in the Far East should be worrying policymakers and bankers more than it is. We are already seeing signs of trouble. JP Morgan is suing several Korean banks which are refusing to pay up on $400m (pounds 240m) of losses on derivative contracts. Indonesia's Exim Bank is losing around $600m in derivative deals that went wrong. And the country's Central Bank faces possible losses of up to $1bn on forward and futures currency contracts, severely depleting its foreign reserves.

These events are probably only the tip of the proverbial Titanic-sized iceberg. Apocalyptic scenarios are conceived far more often than they occur. But restructuring a few billion dollars in Indonesian bank debt will solve nothing if a big problem surfaces in the derivatives markets.