However, he also said the PSBR’s failure to shrink so far this year could simply mean “we have started more slowly on the road of fiscal consolidation”.The gilts market reacted favourably, with the December contract rising over half a point. PAUL WALLACE

Economics Editor
The Bank of England has become more optimistic about the outlook for inflation, but is warning the Government against a giveaway Budget.Since its last inflation report in August, the Bank has shaded down its central projection of inflation in two years’ time, although it still thinks it will narrowly exceed the Government’s target of 2.5 per cent or less.However, the Bank now accepts that “there is now a somewhat greater chance that inflation will be below 2.5 per cent in two years’ time”.The Bank’s chief economist, Mervyn King, said: “We will be Gladstonian in looking at the numbers” in the Budget. At the same time, management had been made more global with research centres in eight countries from the US to Japan being brought under one team instead.Glaxo Wellcome’s new-found productivity in R&D stems in part from the $530m purchase earlier this year of Affymax, a Californian biotechnology company that replaces chemists in the search for new drugs.. Areas of concentration in research will be the neurosciences, anti-virals, cardiovascular disease and cancer, while development will lean towards respiratory ailments, anti-viral infections, diseases affecting the central nervous system, oncology and emesis and cardiovascular and critical care.James Niedel, director of research and development, said that between six and eight layers of management had been reduced to four in the new, much flatter structure introduced in his area of responsibility.

But the research portfolio has been boiled down to 50 big research and 93 development projects, compared with 160 research projects alone at the two companies before they combined. In one of the first big strategy announcements since its pounds 6.3bn takeover of Wellcome in March the group said it would bring three new medicines to market every year from now until 2000.
The move is part of the new competitive pressures surrounding the pharmaceuticals industry, underlined yesterday by reported comments from Jan Leschly, chief executive of rivals SmithKline Beecham, that he expects “double- digit” profit growth from the launch of new products in the future.At the briefing to City followers of the company at its new pounds 700m medicines research centre at Stevenage in Hertfordshire, Glaxo Wellcome’s senior management announced the results of an important review of the drugs pipeline and a rationalisation of the management structure in the wake of the Wellcome takeover.Total research and development expenditure of pounds 1.2bn in 1996 will be little changed from the figure spent by the combined companies in the last reported financial period. The panel has been a year in the making, and there was wide consultation, including with the Corporation, on objectives, structures and membership.. MAGNUS GRIMOND

Glaxo Wellcome, the drugs giant, told the City yesterday that it planned to triple the productivity of its research and development operation. “If we exclude any major market, the whole thing will founder over time and people will rubbish its work,” he said. He has sent the Treasury a list of other representatives who wish to be included in the initiative.The public undermining of what has been a carefully prepared, high-profile panel to bolster the City’s standing here and abroad, has caused considerable irritation in the Treasury. JOHN EISENHAMMER

Financial Editor
The Corporation of London is to meet a top Treasury official in an effort to defuse a row seen as damaging the City’s efforts to promote its image.

Michael Cassidy, chairman of the Corporation’s influential policy com-mittee, will hold talks with Angela Knight, Economic Secretary to the Treasury, on 21 November, about changes to a Treasury panel instituted to promote Britain’s financial capital.The public row, which has provoked anger inside the Treasury, is causing embarrassment to a number of the City’s “great and good”, brought on to what is known as the Chancellor’s promotion panel.The 20-man panel is dominated by heads of big banks, investment banks and insurance companies, such as Lord Alexander of NatWest Group, Win Bischoff of Schroders, Peter Davies of Prudential and Alastair Ross Goobey of Hermes Investment Management, the fund manager.The Corporation, one of the most active bodies in promoting the City’s financial reputation, has written to Mrs Knight proposing that the panel be widened to include a more representative selection of City institutions and businesses.Mr Cassidy said: “There is widespread concern in a number of influential City quarters about the way this initiative has been set up.”We all want it to galvanise the City, and for it to be led by the Treasury, but too many feel left out of the process.”Mr Cassidy cited the Stock Exchange, Lloyd’s of London, the Metal Exchange and Liffe, the futures exchange, as bodies that need to be represented. CSW is expected to announce today it already owns 27 per cent of Seeboard.Comment, page 25. Swalec has entered into a joint development on customer billing systems with South Western Electricity, now owned by Southern Electric International of the US.Takeover fever was further fuelled by rumours of fresh interest from Houston Industries, which was earlier thwarted in attempts to buy Norweb.There was speculation that Houston might be out for a bid battle with Central and South West Corporation of the US, its former partner in the Norweb bid, which has mounted a takeover of Seeboard. But the widespread view is that there is still little love lost between the two companies.Some analysts argue that much of the potential cost savings between the water and electricity operations could be achieved by co-operation without the risks of a merger So far, Welsh Water and Swalec have no collaborations. Swalec resisted any overtures from the water company but the stake was increased to almost 15 per cent in June 1991 and Welsh Water held on to the shares until December 1992, selling at a substantial profit.There have since been senior management changes at both groups and in recent months the map of the electricity industry has been rapidly redrawn. On Tuesday, Ian Lang, President of the Board of Trade, also gave the green light to a potential bid for Northumbrian Water by Lyonnaise des Eaux of France.The relationship between the two Welsh firms has never recovered from Welsh Water’s surprise raid on Swalec in December 1990 – immediately after the electricity firm was privatised – when it scooped up about 9 per cent of the shares. They are smaller than Swalec and even at pounds 10.20 they would be financially stretched – I cannot see shareholders being happy with this,” he added.Welsh Water’s renewed interest follows government clearance at the end of last week for North West Water’s pounds 1.8bn takeover of Norweb.

It is encouraging that others, albeit somewhat later, are coming to the same conclusions.” But one City analyst said Welsh would have to pay more like pounds 11 a share to win the electricity firm and said he did not really expect a bid to materialise.”I do not see Welsh Water winning this. The company, which is advised by NM Rothschild, said: “Pending clarification of Welsh Water’s possible intentions, Swalec has no further comment to make and advises shareholders to take no action.”A source at Welsh Water said: “We have been convinced of the synergies of such a takeover much longer than anyone else has been. The statement made clear that at that price it would include the value of Swalec’s stake in the National Grid Company, which is due to be floated on the stock market next month.Shares in Swalec soared by 70p to pounds 10.58, adding to the strong gains earlier in the week. MARY FAGAN

Industrial Correspondent
The pounds 14bn bid frenzy in the electricity sector was thrust back into the limelight yesterday with a statement by Welsh Water that it may bid for South Wales Electricity. The move comes five years after the water company first swooped on its neighbour, taking its stake to 15 per cent before ultimately selling out.In a terse statement made on the request of the Takeover Panel, the water group said: “The board of Welsh Water has been examining the case for making a takeover offer for South Wales Electricity.” The company said that “in current circumstances” it envisaged any offer being around yesterday’s mid-morning price of pounds 10.20 per share, which would value Swalec at almost pounds 1bn.

The bulletin warns that it means “businesses which are too large to benefit have to compete on unequal terms”. It adds: “But overall the theme of business investment is not out of line with some of our own thinking.”In a separate interview ahead of the CBI annual conference next week, Mr Turner confirmed the CBI view that Labour has moved closer to industry’s thinking on a number of key issues, including macroeconomic policy, although the employers’ organisation still objects strongly to the proposed minimum wage and Labour’s espousal of the European Social Chapter, from which the Government has opted out. But Mr Turner also made clear that there is still considerable distrust among industrialists about whether Labour can deliver on its more industry-friendly policies.He said: “What our Conservative members may well say is that the Labour Party’s words don’t sound bad, but can you trust them? That is still a legitimate question, of course not in the personal sense – but if they were in government, how would they react to stress? Would they stick to what they say? That is a legitimate question for people to ask.”At the CBI conference in Birmingham, Tony Blair, the Labour leader, is to speak on the same day as Michael Heseltine, the Deputy Prime Minister.Mr Turner acknowledged that the CBI is in a sensitive position because anything it says about the political parties can be read as taking sides: “I don’t think we have any choice but to state the facts of where we stand and our priorities, and then comment on the policies of the Government and the Labour opposition as they line up against our priorities.”. It adds that this is “an idea lifted from our Budget proposals last year, and which we welcome, although our own debates suggest that the details of tapering may prove problematic”.It also says that the shadow chancellor’s proposals for an expansion of Tessas and Peps to stimulate savings are also “welcome in principle, although again the details are not clear”.However, the CBI directorate sounds rather more cautious on Labour’s plans to ease the burden of VAT on small business so that they can hire more employees. There has been widespread indignation at Britain’s perceived cosying-up to France on the nuclear issue..