Gordon's greatest goof?

www.thisismoney.com Lisa Buckingham, Mail on Sunday 2 February 2003

HE stock market has ways of making the most sure-footed appear foolish. Even Gordon Brown's reputation for prudence could be sorely tested by the current share price rout.

At the time of the Chancellor's first budget, Brown stealthily removed the tax credit that pension funds had traditionally enjoyed on the dividends* they earned on their shareholdings. It looked clever at the time - to everyone except the pension funds, which sensed the import of what he had done.

The general view was that share prices were rising, and even if the value of pension schemes grew less rapidly, they were still growing.

What the Treasury did not count on was the impact this would have on the behaviour of those funds by encouraging them to put money into gilts* and bonds* rather than shares. This shift was already being advocated by wiser heads in the pensions business. They were reading the demographic runes showing that people were living longer so the cost of providing them with pensions would become greater. With increasingly long-term liabilities, pension funds needed to be sure they could meet payments - rather than using any surpluses in the pension fund to supplement profits in one way or another.

Boots famously became the first big pension fund to make a total shift out of equities* and into bonds in October 2001. But others have quietly been following suit - and share prices have been under pressure as a result of all this selling.

Now the Institute for Fiscal Studies has calculated that the assault on dividend tax credits has deprived pension funds of a stunning £36bn of income over the past seven years. Plunging markets have left pension schemes with a collective black hole of anywhere between £85bn and £150bn, according to your choice of actuary*.

At some stage, companies are going to have to start repairing these deficits if they don't want to condemn their employees to an old age in poverty. This, by some calculations, could cost £10bn a year for the next decade. And that will have to be found from profits.

Because of the slump, Brown's expected tax take from share-dealing - things like stamp duty* and capital gains tax* - is already likely to fall more than £3bn short of what he had hoped for this year.

If companies have to start using profits to pay into their pension schemes, what he can take from business will fall even shorter of his expectations.

Add to this the wallop to consumer confidence and company profits that could accompany this April's tax rises and even Brown's notoriously conservative assumptions could be blown off course.

Clearly, Brown did not cause the collapse in share prices. But the stealth tax on pension funds could prove his most costly mistake.

Fuel's game YOU do not have to believe that President Bush's burning desire to consign Saddam Hussein to the despot dustbin is all about oil. But it helps.

Impending military action against Iraq underlines the West's failure to confront one of the most crucial challenges of the past 30 years - security of energy supplies.

Iraq's massive crude oil reserves - 112bn barrels - mean it is the only country capable of replacing Saudi Arabia as the world's leading petrol station.

An Iraqi regime that looks favourably on the West would go a long way to ensuring that oil keeps flowing cheaply. But even at the best of times the Middle East is a tinderbox; there is no guaranteeing the stability of Saudi Arabia, let alone an Iraqi regime that is seen as the spawn of the Great Satan.

The West has signally failed to respond to the economic threat posed by volatile, and frequently hostile, oil producers housed in the Opec cartel. The civil strife in Venezuela, which is now on the point of imploding, is another ominous example.

The writing was on the wall as far back as 1973 when the infamous Arab embargo quadrupled the oil price in a matter of weeks and pushed the world into recession.

Frenzied policy-making followed in an attempt to break the West's addiction to oil imports. But in the case of the US, the habit has only grown - despite further Middle East-inspired oil shocks.

Bush's pledge in his State of the Union address to provide funding of $1.2bn to help develop hydrogen-powered cars is the latest in a long line of token gestures from the land that brought us gas-guzzling monsters.

In the UK, we may feel smug in our role as a net* oil exporter, though this will not be the case for much longer.

Strategic oil reserves aside and whatever Bush's motives for going to war, the West should now learn its lesson and develop a strategy to lessen its long-term dependence on Opec.