Outlook: Brown can still borrow to spend, but he's taxing instead

Six Continents; WS Atkins

There is no doubt a story of some sort in the admission by "sources close to" Gordon Brown that his Budget forecasts for economic growth will need to be cut, but it is surely not the one the headline writers seized on. The Chancellor's Budget plans are not yet in disarray, notwithstanding lower than predicted growth, nor will he have to raise taxes or slash public spending to deal with the slowdown.

Or not yet, in any case. According to the Institute for Fiscal Studies, every one percentage point off growth equates to roughly £6bn in lost tax revenues. That might seem like a big number, but nobody expects growth to fall short of forecast by a full percentage point for this year nor is there any possibility of the Treasury slashing its forecast for next year by such an amount.

And even if it did, it would still not be enough to derail the Chancellor's previously announced plans. The Chancellor's own "golden" rule is to balance the Budget over the lifetime of the cycle. Borrowing for investment is allowed on top. Within reason it matters little if growth forecasts are not being met at the bottom of the cycle. That's how the Chancellor will see it, and that is how it will be presented in the pre-Budget statement next month. A two-year growth shortfall of a full percentage point might be enough to put the public finances in breach of the eurozone's Growth and Stability Pact rules, which require budget deficits to be kept below 3 per cent of GDP, but that says more about the credibility of the stability pact than it does the Chancellor's fiscal prudence.

Now, if what at present looks like a cyclical downturn turns out to be something more permanent and structural, then the Chancellor will indeed be in trouble, as we all will. Few policy makers yet take the view that growth is going to remain weak or negative for years to come, even if that is what the stock market seems to be indicating.

Even so, missed economic forecasts are pretty much a first for this Chancellor. For most of his five and a bit years in office, Mr Brown has had the following wind of a booming US economy. There has only been one previous occasion when the forecasts seemed to be in doubt, which was during the Russian debt default of the autumn of 1998. In the end the Chancellor exceeded them by a country mile.

No such turnaround is likely this time, which leaves the Government having to fall back on the parlous state of the world economy by way of excuse. For some reason, the Chancellor never alludes to his own particular contribution to our downwardly mobile growth performance, which is constantly to load the private sector up with more tax and social legislation. Nothing is guaranteed to do greater damage to business investment and jobs than an unduly onerous tax regime, and the Chancellor is already perilously close to it.

The 1 percentage point increase in the employers' rate of national insurance, which kicks in next April, is a particularly pernicious tax hike which many employers will chose to pay for by shedding 1 per cent of their workforces. It is textbook stuff that governments should borrow more to spend in a downturn, thus partially offsetting the private sector slump, but to raise taxes to spend more is not what Keynes would have ordered. That's just robbing Peter to pay Paul. The public sector is always less innovative and less efficient than the private sector, so there is no chance of it improving economic or productivity growth.

Six Continents

Six Continents is the silly name that Bass alighted on for the purpose of disassociating itself from its roots in the beerage when it flogged off its breweries to Interbrew a couple of years back. Now it is abandoning all ties with the past by demerging the pubs business as well, leaving the company as a pure international hotels group, together with a small and superfluous soft drinks operation. This is the sort of "focus" that investors are supposed to like, but they can hardly be expected to give it an overwhelming vote of confidence when it also results in an effective 38 per cent cut in the dividend.

The truth of the matter is that Bass's transformation from brewer to hotelier has been an almost complete waste of time and money, benefiting no one other than the investment bankers who did the deals. Sir Ian Prosser, the Bass chairman, got a good price for his breweries. For that at least he cannot be faulted. Interbrew payed a monopoly price in the naive belief that competition regulators would allow Bass to be crunched together with Whitbread. Sir Ian Prosser, the Bass chairman, had spent years trying to bring about a similar consolidation, and learned to his cost that it could not be done. He was happy enough to let the Belgian brewer try and fail again.

Even so, the transformation from beer to hotels looks a pointless and value destructive one. Bass had nowhere to go in the mature British beer market, but other brewers have addressed similar constraints by expanding internationally. Interbrew, Scottish & Newcastle and SABMiller have all achieved varying degrees of success as pure international brewers. Bass chose diversification instead, thus swapping an industry it knew something about for one it had no track record in whatsoever. It is no wonder that it's performance as a hotelier has been less than impressive. Hotels are a capital intensive, operationally geared industry which invariably gets clobbered in any downturn. Bass professes itself disappointed that despite difficult trading conditions for the hotels industry, it hasn't been able to pick up more assets on the cheap. What a relief.

WS Atkins

WS Atkins, a staid old form of consulting engineers until it discovered the PFI, has been delivering up a steady stream of bad news to the stock market all year long, but in the main it's been little worse than anyone else's. Yesterday the dam finally broke with news that profits this year will be less than half of last year's and 65 per cent below analysts' forecasts. Net debt has suddenly doubled, putting a terrible squeeze on cash flow.

Not surprisingly, the share price collapsed faster than cranky scaffolding in a high wind.

For once it is not the PFI, the bane of the support services sector as well as the unions, which is to blame. The problems lie in more familiar territory. Atkins has cocked up the introduction of a new IT system which was supposed to make billing easier and help its engineers to talk to one another. At the same time, Atkins' traditional private sector business – quantity surveying and the like – has dropped off a cliff, both here and in the US. Mismanagement is accompanied by its usual bedfellow – a complete failure by senior directors to see the steamroller coming towards them and guide market expectations appropriately.

Robin Southwell, the straight-talking chief executive that Atkins hired only 18 months ago from BAE Systems to shake things up a bit, has been shown the door in suitably no-nonsense fashion. The chairman is doubling up the roles until an successor is found. A further 400 staff are going, mainly from the UK headquarters at Epsom, which should make a decent enough inroad into Atkins' cost base.

But the recovery is built on shaky foundations. All it will take is a couple of PFI cock-ups, which as the private sector is learning to its cost are all too easy to achieve, and the company is sunk. Atkins has underperformed even the bombed-out support services sector by 50 per cent since the start of the year. Following yesterday's 72 per cent drop in the share price, the job of rebuilding Atkins' reputation looks more daunting than ever.

jeremy.warner@independent.co.uk