Once Mr Rice has used up the cost savings that the merger will generate

Once Mr Rice has used up the cost savings that the merger will generate, it is difficult to see where the growth will come from to keep shareholders sweet. Operating margins are barely moving, some of LucasVarity's most important markets in the US and Europe remain obstinately flat and the aerospace business continues to sit uneasily alongside diesel engines and braking systems.LucasVarity may be pleased with the progress it has made since last summer but no-one else is. The financial rationale for the merger looks as unconvincing as the industrial case Poor Mr Rice is at his wits' end He is not, he laments, getting the message across. In that, at least, he has the wholehearted agreement of the markets.Government may tap into service sectorRenewed strength in the stock market, dragged up once again yesterday on the coat-tails of Wall Street, shows just how fixated investors have become on the Dow and on the hopes and fears for interest rates that are driving the American market.

Research from BZW, suggesting equities are sitting on a pounds 10bn fiscal timebomb, made not a jot of difference.Which is surprising, because if BZW's figures are right, and an incoming Labour government breaks with tradition and starts to do something about the creaking public finances, shares are in for an extremely bumpy ride. An underlying pounds 30bn borrowing requirement at this stage in the economic cycle is a clear sign that the sums are not adding up.That sort of shortfall will take some unwinding and you can bet your bottom dollar that in the short term it will not be the electorate that picks up the tab but the corporate sector, where the damage can be more acceptably disguised by the present strength in profits and cashflows.Talk about tighter fiscal policy is easy in principle, but what it means in practice is that someone has to actually pay higher taxes. Raising the headline rate of corporate tax is a no-no so soon after that charm offensive on the business community, even if it is one of the few tax rates Labour has not committed to leave unchanged, so raising the pounds 5bn BZW estimates companies will be asked to stump up will demand some cleverer ruses than that.Capital allowances cost the Treasury pounds 20bn a year, making them an easy target even for a party as fiercely critical about Britain's investment deficit as Labour has been. Kenneth Clarke tackled "long-life" assets in his last budget.

Gordon Brown will want to tread a careful line on an approach to fiscal tightening that might threaten the investment it claims to champion.Even so, he will find few critics of a change that clamps down on the allowances given to pub groups to tart up their estates or to property companies to refurbish their portfolios. Leisure companies and other service sector businesses, which are already facing the uncertainties of a minimum wage and consumers potentially looking at higher tax bills themselves, look especially vulnerable in the search for new sources of revenue.. A show of hands consigned British Telecom to the history books yesterday after shareholders voted overwhelmingly to approve the planned merger with MCI of the US at an extraordinary general meeting in Wembley. Around 620,000 of BT's 2.3 million small investors voted by post, with more than 90 per cent in favour of the pounds 13bn deal, the biggest in UK corporate history.

Institutional investors, which own 74 per cent of BT, voted by 99.8 per cent to approve the merger. A larger-than-expected contingent of 831 mainly retired shareholders turned up to yesterday's egm. When the vote came shortly after midday just a tiny scattering of hands were raised in opposition. The vote will change the name of the company from British Telecommunications to Concert.Though several investors questioned the price of the deal and its benefits for UK consumers, there was no mention of possible executive bonuses or pay rises.Sir Iain Vallance, BT chairman, described the merger as a "rite of passage" combining "a powerful mix of feistiness and stability". He said BT and MCI were "the world's best market defender coupled with the world's best market attacker".The merger still requires clearance by the US regulator, the Federal Communications Commission and the European Commission. Sir Iain suggested the merger could be completed as early as the summer.The egm was picketed by BT managers who used the session to announce an escalation in their campaign of industrial action over pay.

Up to five BT offices in central London will be affected by a three-day strike starting next Wednesday, called by the Society of Telecommunications Executives. The union, which represents 18,000 BT managers, warned customer service could be affected.People & Business, page 26. The public finances are so fragile that an incoming Labour government will have to find up to pounds 5bn a year in extra corporate taxes, new research claims, undermining earnings growth forecasts and putting a lid on dividend payouts. Domestic companies face a double hit as personal taxes are also pushed higher in an effort to raise a total pounds 10bn a year to reduce a bloated public sector borrowing requirement (PSBR). As a result, BZW said this week, the stock market needs an unexpected interest rate surprise to justify its current level. Sectors at particular risk from a revenue-hungry new government include leisure, brewing and property, with oil companies and banks unlikely to escape the attentions of Gordon Brown for long.According to Richard Kersley, equity strategist at BZW, the UK market remains fixated on the future direction of monetary policy after the election and has not yet taken seriously enough the threat of tax rises in both the consumer and corporate sectors.He believes Labour, which has already signalled its intention to raise a windfall tax on the utilities, will turn its attention next to companies that, for a variety of reasons, currently pay less tax than the average.Options for solving the revenue shortfall, which BZW believes will leave the public sector borrowing requirement at an uncomfortable pounds 30bn this year, include an increase to the corporation tax rate and more windfall taxes outside the utilities sector. More likely, given the policy priorities of a Labour government, is a widening of the tax base by closing loopholes or reducing allowances to put a squeeze on companies perceived to have had an easy ride.The most widely discussed tax-raising option so far, an abolition or reduction of the tax credit on dividends, would be tempting for a Labour chancellor, but the issue is highly complex and BZW believes an early move on ACT is less likely than a more general review of the whole imputation system further down the line.If taxes rise as BZW expects, the outlook for earnings growth will deteriorate considerably, from current 1998 estimates of about 10 per cent to as low as 7 per cent.