The road to uncertainty

Post-Budget focus: an MP takes a critical look at Gordon Brown's measures, while a financial strategist hails the golden age

BUSINESSMEN who hopped on the New Labour bandwagon before it reached Downing Street - like Richard Branson and Martin Taylor - must be feeling rather smug. They correctly judged that Blair and Brown meant what they said about the enterprise culture, rigorous financial discipline and the global marketplace.

A major advance in the last year has been the importance laid on long- term financial stability. After two recessions and one-and-a-half booms in the last two decades, the change is welcome, and overdue. As a result of the creation of an independent Bank of England and the prospective Fiscal Responsibility Code, monetary and fiscal policy should become more predictable and transparent, with lower average inflation.

The Government, moreover, is to be commended for its open-mindedness in drawing upon ideas from the Liberal Democrats at home and the New Zealand Labour Party overseas in order to improve the quality of economic management.

One awkward loose end is the exchange rate. Sterling's appreciation is contributing to a potentially serious manufacturing recession. Recent history, in Asia as well as Europe, has shown that there is no middle way between the current freely floating regime and completely fixed rates, as in monetary union. The Government has announced its intention to travel from the former to the latter. It knows the destination, but has only a sketchy idea of the trajectory to reach it, or how it will eventually execute the tricky docking manoeuvre with the functioning EMU. Business faces damaging uncertainty as a result.

The Government may yet be forced by events to rethink its decision to postpone a referendum on EMU until after the next election. What is needed is a clear timetable for EMU entry.

One positive legacy of the Conservative years is a highly competitive environment for investors and entrepreneurs. The Budget supports this inheritance. The cut in corporation tax is a strong signal. Two reservations, however, remain. First, despite the headline cut in corporation tax, the July and March Budgets together take an extra pounds 20bn out of company profits.

Second, we have yet to see the small print of proposals on North Sea oil taxation and on the proposed new industrial energy tax. The latter could open the way to a more rational, as well as environmentally friendly, system of energy taxation with which business is comfortable; but it could also degenerate into another revenue raiser for the Treasury.

A more demanding test of Government economic policy is whether it contributes to underlying growth. The Budget Red Book is modest in its growth expectations. It reminds us that Britain has chugged along for a century and a half at a steady trend rate largely unaffected by the Gold Standard, Empire, the IT revolution or even Mrs Thatcher. Gordon Brown is a small blip on that historic graph. But some of his initiatives are helpful.

The tax and benefit reforms designed to reward work are welcome, not only for helping the unemployed but for increasing the labour force.

Overall, the Budget is friendly to business. If there is a criticism, it is that the Government is trying too hard to make amends for a "tax and spend" reputation. It is starving key public services of additional resources for which the electorate, including many business people, would willingly pay more.

Like company managers unduly anxious to please shareholders, Great Britain plc has opted to hold down investment in its staff in order to boost dividends: good for short-term stock market valuation; but not too smart for long- term growth.

q Vincent Cable is the Liberal Democrat finance spokesman and former chief economist at Shell.