ALEX BRUMMER: An Irish threat to Osborne's rosy forecast

By ALEX BRUMMER, CITY EDITOR
Updated:

Many of the uncertainties surrounding the forecasts from the Office for Budget Responsibility relate to Ireland and the euro.

No one can be entirely sure how the crisis in euroland will eventually unfold and what the cost to Britain will be.

Certainly, Chancellor George Osborne was right to point out in the Commons that had not his government taken the stern measures in the emergency budget in June then Britain might have been caught up in the whirlwind.

Chancellor George Osborne

Flag day: George Osborne pointed out that his government took stern measures


But, to be absolutely fair, the first steps towards dealing with the deficit were taken by Alistair Darling in March  -  although the new Labour leadership prefers to forget that.

It is by no means clear that the deal for Ireland has drawn a line under the euroland crisis. The improvement in the market s for Irish, Portuguese and Spanish debt was very short-lived.

It was this, rather than the generally upbeat OBR forecasts, that sent UK equity prices tumbling by more than 2pc in latest trading and caused the pound to edge down against the dollar.

The biggest risk to Britain from the euroland crisis is almost certainly through the banking sector. The OBR notes that British banks are exposed to Ireland to the tune of £82bn, of which some £6.4bn is sovereign debt. It says, however, that at present it does not expect this to derail the recovery in the British financial sector. But it is clearly a risk.

The most interesting aspect of the Irish rescue is the proposal to create a new facility  -  the European Stability Mechanism  -  to replace the current fund under which Ireland and Greece have been bailed out. Interest in the UK has centred on the fact that George Osborne has secured some kind of opt-out beyond 2013.

But the key is the suggestion that the ESM will force write-downs on private sector debt as part of a restructuring. This raised the question of whether sovereign debt obligations will be rewritten too, a future source of uncertainty.

The better news is that while Britain is exposed, to different degrees, to financial problems in the periphery, this should not greatly affect trade prospects. Our biggest markets in Germany and the United States are recovering nicely.

Nevertheless, while the OBR forecasts may be robust for now in today's turbulent markets, matters can change overnight as we saw after Lehman. The challenges for new chair Robert Chote and the OBR may be just beginning.

King at bay

Mervyn King is taking quite a bashing at present. It is just as well that he is comfortably into his second and final term as governor of the Bank of England.

Cables leaked on WikiLeaks suggest that King was not that impressed with his parliamentary masters David Cameron and George Osborne in opposition and felt that they 'lacked depth'.

One assumes he quickly changed his mind after the election, when the Bank was empowered over financial stability by the coalition government, which controversially won King's support for radical fiscal solutions.

Former chancellor Alistair Darling has, however, thrown some fat on the fire ignited by Adam Posen last week.

In an article in the FT he suggested that when members of the Monetary Policy Committee and the Tory chair of the Treasury Select Committee suggest that King may have crossed the 'political line', the Bank needs to think 'long and hard' about what it says.

One cannot but think that Darling, among others, is settling some old political scores with the Bank.

But it would not be surprising if the normally plain-spoken King proves a little less forthright in the future when others are listening. Big brother is everywhere.

R&D boost

There is still some way to go before the Chancellor finds a way of reversing the trend for UK companies to head overseas (mainly to Ireland) in search of a more favourable tax regime. nevertheless, Osborne's decision to implement the so called 'patent box', first unveiled by Labour, should help secure the presence of big pharma in Britain.

Andrew Witty, chief executive of GlaxoSmithKline, was quick to embrace the scheme, promising 1,000 jobs and £500m of extra investment now that it has been adopted.

But David Brennan, CEO of AstraZeneca, is no less enthusiastic, even though its R&D headquarters is currently in Sweden.

Tax breaks can make a real difference.

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