British Business Starts To Get The Message

A "windfall profits" tax and other Labor moves provoke fears

A wave of euphoria swept Britain after Prime Minister Tony Blair's May 1 triumph. Business executives did their share of celebrating. Now it's the morning after, and some of them are starting to groan as the new government rolls out its program. The loudest complaints are coming from British Telecommunications PLC, which Labor now says is likely to be hit along with other privatized utilities by a planned "windfall profits" tax of up to $8 billion. On May 15, BT Chairman Iain D.T. Vallance threatened to mount a legal challenge to the tax. "I wouldn't have voted for Labor," he said, if Labor had included a tax on BT in its manifesto.

Of course, Vallance is probably engaging in a bit of gamesmanship. Labor has had the tax on the table for more than a year, and BT knew it might get caught in the net. Still, the spat shows that business is discovering with a jolt that there will be real differences between a Labor government and its Conservative predecessors. Above all, Blair's team seems much more inclined to intervene when they see public welfare at stake--especially if they can generate favorable publicity.

Labor ministers already are pressing business on several fronts, from the arms trade to tobacco sales (table). Foreign Secretary Robin Cook has vowed that British arms won't be used for "external aggression or internal repression." That could jeopardize lucrative deals that British Aerospace PLC has with regimes such as Indonesia's.

Labor also has launched an attack on smoking. Blair is readying legislation banning tobacco advertising and sponsorship of sporting events, now totaling about $16 million a year. Barrie Gill, chairman of sponsorship consultants CCS International, says this wouldn't hurt big professional sports such as soccer, where tobacco is already out, but will slam small ones such as snooker, darts, and bowls, where cigarette-company support is key.

So far, all this is relatively minor. But Blair has to be careful that his ministers don't create the cumulative effect of being meddlesome and antibusiness. The windfall profits tax is likely to be the most dangerous issue for him. If BT and other potential targets such as British Gas and the British Airports Authority (BAA) put up strong resistance, Blair could quickly get a black eye in the business community.

The tax was dreamed up by now- Chancellor Gordon Brown's aides well before the election. Brown wanted money for his estimated $5 billion job-creation program. The solution: a special tax on the water and electric companies that were privatized under the Conservatives. These companies are an easy target because the public believes the Tories sold them too cheaply and because many of their executives have done very well for themselves through buyouts and salary increases.

But in practice, the tax is likely to fall on current shareholders, not those who profited from privatization six or more years ago and are long gone. That is one of the reasons many economists consider the tax terrible policy. "The public perceives it as a tax on fat cats, when of course it isn't," says Lucy Chennels of the Institute for Fiscal Studies, a London think tank.

Until Brown unveils the tax this summer, it is hard to tell how much each company would be forced to pay. Assuming an $8 billion tax, estimates of the cost to BT, BAA, and British Gas range from $1.3 billion to $3.4 billion, depending on how it's assessed. Roughly 30 water and power companies would pay the remainder.

With controversy growing, Brown will have to handle the tax issue carefully as he draws up and presents his emergency summer budget. Labor sees BT as a key player in its plan to boost high-tech industry and doesn't want to alienate the company. At the same time, if too much of the tax is shifted to the privatized utilities, the government could wind up in a fight with the relatively new U.S. owners of several of them.

Labor also will have to be very convincing that this is a one-time tax and that it won't be going after other companies with big profits. Blair and Brown can probably get away with this tax because they were up front about it. But another politically motivated tax could be a serious blow to confidence.

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