In the City
Ideas for Mr Redwood
Jock Bruce-Gardyne
On Tuesday, to the immense relief of all Spectator readers, Mr John Redwood took up the baton from Mr Ferdinand Mount. The relief of Spectator readers, let me hasten to add, implies no criticism of Mr Mount's performance as maestro of Mrs Thatcher's think tank — on the contrary, he proved an invaluable philosopher-in- waiting at No 10, and played a crucial role in shaping the Government's election- winning strategy. But Downing Street's loss is Doughty Street's gain.
His succesor brings a different mix of talents and experience, but not the less ap- propriate for that. A fellow of All Souls from the New Court stable of N.M. Rothschild, Mr Redwood is an established authority on public expenditure policies in general, and the management of the na- tionalised industries in particular, and his training in the City fits him well to guide and stimulate the Government's plans for returning nationalised assets to the private sector.
He is likely to find, like his two predecessors, Sir John Hoskyns and Mr Ferdinand Mount, that the job is very much what he chooses to make of it. He will no doubt be given specific trouble-shooting tasks from time to time by the Prime Minister (the present wrangle between the Treasury and the Department of Energy about electricity pricing could well be one of his first assignments). But he will also have the opportunity, if he is so minded and I should guess he would be — to do some private enterprise snooping round the corridors of Whitehall and to come up with his own, preferably iconoclastic, ideas. Since he surely will not want for work, he may not say thank-you for suggestions. Nevertheless, here goes.
First (although in no particular order of priority or significance) he might care to ponder the rights and wrongs of the somewhat incongruous tax treatment of in- vestment in government gilts. Chancellor Lawson has, inevitably and properly, called a halt to the use of offshore `roll-up' funds to enable high taxpayers to convert income into more tax-efficient capital gains. But the effect of this act of fiscal justice has been — to put it mildly — somewhat blunted by the judicious issue by HMG of low-coupon bonds to mop up some of the monies withdrawn from the 'roll-ups'. And why should this particular form of funding be deemed especially suitable for the pur- pose? Because it offers another pathway to an even more convenient result. The former investor in a roll-up who switches into the Treasury 21/2 per cent 1986 tap stock, of- fered at £84.50 in November, for example, has only to wait a couple of years to pocket £15 on every £100 nominal invested, entire- ly free of tax. A nice cheap form of fun- ding, certainly: but a former employee of N.M. Rothschild, which led the field in roll- ups, could be forgiven for looking on it with a somewhat jaundiced eye.
The anomaly goes wider. Ever since the universal availability of indexed gilts pro- voked City interest in deep discounts and zero-coupon bonds the Treasury has quite logically — insisted that 'tax neutrality' should apply. If a borrowing company wanted to be able to treat the in- crement in the value of such bonds to maturity as a form of interest, and hence allowable against its tax liability, then it must also be treated as taxable interest in the hands of the lender or investor. Similar- ly if the lender were to claim benefit of capital gains tax treatment, then the bor- rowing company would have to treat the appreciation in the cost to it of repaying the bond as capital, which it could not set off against tax, Yet the Government's own low coupon stocks enjoy precisely the tax treat- ment that the City seeks for similar cor- porate offerings.
At least a partial solution would be to sweep away the capital gains tax exemption of government stocks. The objection to do- ing that, of course, is that then the Govern- ment would have to pay more for its money, thereby raising the cost of borrow- ing all round. Still, the present ar- rangements are anomalous; and Mr Red- wood might feel inclined to remind the Chancellor that he was one of the prime ar- chitects of the indexation of tax allowances — in the cause of 'fiscal honesty'.
There is another little tax conundrum to which Mr Redwood might care to give some thought, since it is just possible that it could cause the Government quite a spot of bother. Two and a half years ago the Treasury slipped into the 1981 Finance Bill the so-called `Mossmorran clause'. This concerned the tax treatment of feedstock for the petro-chemical white elephant which Shell and Esso are busily constructing — at vast cost to the taxpayers — in Fife. But two of the Mossmorran partners' rivals, BP and ICI, complained that they could not benefit; and ICI has taken the Government to court. Since the clause was carefully drafted to avoid the charge of discriminaton in favour of two specific tax- payers, ICI will have an uphill task to win its case before the UK courts. But they have made it clear that if they lose they are mind- ed to appeal to the European Court, and here the issue is much more open. Yet if the European Court were to order the UK Government to rescind the Mossmorran clause, Shell and Esso would undoubtedly scream blue murder. A little contingency planning might not come amiss.
Turning to the nationalised industries, Mr Redwood, with his background, will surely involve himself in the arguments about the techniques of flotation. I can't see him losing much sleep over the quest for an ideal selling price which at one and the same time attracts the small investors, max- imises the contribution to government revenues, and satisfies the underwriters, since he would know it was a will o' the wisp. But I hope he sometimes questions whether the cost of underwriting is really worth it in terms of risks avoided. After all the primary justification for privatisation is not the reduction of the Budget deficit (where the arithmetic continues to look dubious despite Mr Lawson's strenuous ad- vocacy), but the exposure of the manage- ment of public corporations to competition and the judgment of the market-place.
He can be relied upon to approach without illusions schemes for market fun- ding by those corporations which remain in the public sector. Where they come up with proposals so structured that the private in- vestor takes on a genuine commercial risk, they may find in him an ally against the scepticism of the Treasury. When — as will more usually be the case — they are simply trying to get round their external financing limits, and having to pay rather more than the Government would have to for the privilege, he will no doubt give short shrift.
Last, but not least, Mr Redwood will, I imagine, be expected to contribute to the articulation of policy. Here he might cast a glance at the antics of those self-sustaining moaning minnies, the nationalised in- dustries' watchdog committees. There was a particularly choice example of their han- diwork only this week: the outburst from the Transport Users' Consultative Commit- tee for London and the South-East over British Rail's plans to rationalise some of its midday services. At the revelation that two country stations in Sussex were to be deprived of trains between 10 am and 4 pm the secretary of this august body, a Mr Gill, blew his top. 'So many people chose their major investment in life, their home, because there is a train service to take them to work.' What time, one wonders, does Mr Gill clock in for work?
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