Tony Blair Pays Court To Business

But how long will the new Prime Minister's romance last?

Following their huge May 1 election win in Britain, new Prime Minister Tony Blair and his inner circle were looking for ways to reassure a skeptical business community. Less than a week later, they came up with a market coup. On May 6, Chancellor of the Exchequer Gordon Brown announced that Labor would turn over the responsibility for setting interest rates to the Bank of England. The change, he said, would ensure that "decisions are taken for the long-term interests of the economy, not on the basis of short-term political pressures."

Brown's gambit was a hit with moneymen, long upset by the influence that politicians wielded over British monetary policy. For months, the outgoing government had ignored the central bank's advice to raise rates. Brown, by contrast, hiked short-term rates by a quarter of a percentage point before proclaiming the central bank's new independence, and the bond market rewarded him by pushing long-term rates steeply down. The Labor team's empowerment of the central bank "shows they mean business," says Michael Hughes, managing director at investment bank BZW Ltd.

GLOBAL SKILLS. It was a cagey move for a new government that business is watching with an eagle eye. Executives have for the most part been quiet, yet some mutter about moving money and operations elsewhere. Labor's agenda does include policies that cause companies alarm, and the Blair government is expected to favor more regulation than the Tories. But Blair could prove to be a leader business can live with. "They've set out a series of policy objectives that are fine. Now they've got to deliver on it," says James Hall, managing partner at Andersen Consulting.

Blair is certainly tough--as he showed in revamping the long-unelectable Labor Party. As a center-left politician committed to free-market principles, he could restore momentum to an economic reform program that was running out of steam after 18 years of Conservative rule. He could start modernizing Britain's creaking welfare state. He also may have a better grasp than his predecessor, John Major, 54, of the global technological revolution and the skills Britain needs to take advantage of it.

But while Blair may prove benign for business overall, he won't leave the environment untouched. The Tories were laissez-faire to a fault, as their failure to warn the public of the dangers of mad cow disease in the mid-1990s showed. Blair will probably be more pro-consumer and interventionist. Legislation against tobacco advertising is high on his to-do list. Alcoholic beverage companies that target minors may also come into his sights. And Tom Bury, CEO of Ogilvy & Mather London, thinks that overly aggressive toy ads on television could come under scrutiny. Blair may also be more protective of local jobs than the Tories have been. While Labor has backed off its threats to cool Britain's takeover boom, some are predicting that the party will block the proposed merger between British Airways PLC and American Airlines Inc.

Another possible wrinkle of the Labor victory: Labor may be more inclined than its predecessors to back big homegrown employers such as British Telecommunications PLC. For example, the business manifesto published during the campaign proposes lifting the ban that prohibited bt from delivering broadcasting entertainment over its network. That would be a blow to companies such as Telewest and General Cable, which were promised monopolies until 2002. A multimedia joint venture bt announced on May 6 with Rupert Murdoch's powerhouse British Sky Broadcasting PLC will put further pressure on the cable companies.

In addition, although Blair values the City of London's contribution to the national economy, the financial sector had better watch its Ps and Qs. Blair has put a respected and tough politician, Helen Liddell, in charge of City regulation, and Labor plans to consolidate the many City watchdog agencies under one umbrella. Publicity about financial scandals and stratospheric pay has made the foreign-dominated brokerages and investment banks ripe targets for criticism. More incidents like the costly scandals at Barings and Morgan Grenfell Asset Management Ltd. could lead to a stricter regime than the City expects.

Blair will also change the workplace. He will pass a minimum wage and sign onto the European Social Chapter on workers' rights. The impact of these moves may not be huge at first. Blair is likely to go for a fairly low minimum wage of $5 to $6 an hour. And so far, the Social Chapter, dealing with unpaid parental leave and requiring management to keep workers informed of business plans, doesn't contain anything that scares big business. But the worry is that after Britain signs on, Brussels could use it to force Europe's rigid work rules on Britain.

And it is on labor issues that Blair may be most vulnerable to leftist pressure from within the party. His huge parliamentary majority means a sizable contingent of left-wingers made it into the legislature. Already, Ken Livingstone, an outspoken backbencher, has angered the Blair brass by calling for a big tax increase during a bbc radio interview. And Livingstone says he will form a committee to oppose Blair's free-market tendencies.

Although Blair's Cabinet is mostly Labor stalwarts, the new Prime Minister has put a handful of innovators in key slots. One is the maverick Labor mp Frank Field, who has wowed executives by calling for sweeping reforms of the welfare state and who will take the No.2 job at the Social Security ministry. His presence could signal a tougher-than-expected approach to welfare as well as early pension reform, both policies that business would welcome.

But the pivotal figure in the new government is likely to be the Chancellor of the Exchequer. The 46-year-old Brown carried much of the load of reassuring business during the campaign. Now the "Iron Chancellor," as Blair calls him, must deliver on his promises: to stick to the Tory budget for two years, not to increase personal income tax rates for five, and to hold inflation at or below its current 2.7% a year. Brown's interest-rate hike came after seeing Treasury projections that inflation could approach 4% in 1998. If he stays the course, British long-term interest rates, higher than those elsewhere in Europe, could come down substantially--a boon for Britain's businesses and homeowners.

DONE DEAL. Brown has a hard act to follow. Outgoing Chancellor Kenneth Clarke left a budget that many economists think is a poisoned chalice for his successor. Government spending is projected to grow far less than 1% annually for the next three years--a rate no British government has achieved since World War II. Brown may find himself caught between Blair's promises to improve the National Health Service, education, and other services and the markets' readiness to punish any backsliding.

Yet the strong economy that Blair inherits is more of a plus than a minus for Labor. Hughes of BZW thinks the chance of recession in the next five years is less than 20%. That gives Brown room to raise taxes in the special budget he is planning for July. Many economists and executives think the windfall profits tax--expected to net $5 billion to $8 billion--that Brown plans to slap on privatized utilities is bad policy. But Labor has warned of the move for so long that Britons consider it a done deal. And business prefers tax hikes to interest-rate rises as a way of cooling the economy. The worry is that if the central bank raises interest rates sharply, the pound, whose steep rise against other European currencies is already hurting exporters, would move up even more.

Blair and Brown look pretty unassailable at this point. They have a huge majority and a five-year term. And they know that the best way to ensure a second term is to keep the British economy humming. That may be the best guarantee for business in the Labor win.