My Life, Our Times

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My Life, Our Times Page 43

by Gordon Brown


  Since we had consistently paid for the expansion of public services not by amassing debt but from the proceeds of growth and tax rises, revenues were not falling before the crisis but rising – from 34.1 per cent of national income when we came to power to 36.4 per cent in 2007–8. And while up to 2003 the tax share from business had been falling, it had been rising from then onwards. Indeed, as the Institute for Fiscal Studies reported, revenues from 2005 to 2008 were ‘growing more quickly than spending’ with the result that public sector net borrowing fell from 2.9 per cent to 2.4 per cent of GDP between 2005 and 2007, while debt at 35.5 per cent of GDP in 2007–8 was lower than what we inherited. Public spending at 38.6 per cent of GDP was lower than it had been for most of Mrs Thatcher’s time in government.

  The Treasury had maintained its control of the public purse. We entered the global financial crisis with debt and deficits low by historical standards. There was no profligate pre-crisis spending spree. Indeed, in September 2007, the Conservative shadow chancellor George Osborne had explicitly declared that he would match Labour’s spending promises; and the Tory policy of combining the annual spending increases we proposed with tax cuts meant they proposed a far larger deficit and debt.

  But if I had a problem in convincing the public, I had – just as Keynes did – as big a problem in persuading the permanent secretary of the Treasury. As the recession started to bite, I could sense from my new vantage point in No. 10 that there was a change in the air at the Treasury.

  By moving to the forefront of its role promoting industry, productivity, science, healthcare and poverty alleviation, the Treasury was praised and criticised in equal measure as it bestrode Whitehall between 1997 and 2007. From 1997 I had worked closely with my Treasury team, cooperating day after day, valuing each other’s advice and perspectives – we had grown together. Despite opposition from his peers, I had promoted Nick Macpherson from private secretary to managing director, when he ably masterminded the introduction of tax credits, and then to permanent secretary. He had smoothed our first difficult days when we made the Bank of England independent, effectively led welfare reform and became a popular leader of a department that was often thought of as difficult to lead, despite (or perhaps because of) having some of the best brains in the country.

  But as I surveyed the response to the recession, I was alarmed. Was I now witnessing this once powerful institution retreating into a shell? Was it shifting away from being the activist department that said ‘yes’ to innovation and reform and reverting to its traditional role as the finance department that specialised in saying ‘no’?

  When the recession started to engulf us, I could see the need for far more effective coordination across government. I thought of changes that would have put Gus O’Donnell, who had experience in both the Treasury and the Cabinet Office, in charge of a joint operation, with Nick becoming secretary to the Cabinet. When I told Gus very confidentially what I was considering, and simply asked him for his personal and private view, he broke my confidence by telling Nick, who clearly – and wrongly – regarded it as a demotion. Between them they scuppered the plan; from that time I could sense my relationship with Nick would never be the same again. While I felt we needed to see greater flexibility and innovation within government, we struggled to tackle new problems within an old and ostensibly tired machine.

  I’m told that Nick proudly displayed in his office a statue of Philip Snowden, the parsimonious chancellor of the 1920s and 30s, who had left Labour to join a coalition government committed to austerity; and who, in his enthusiasm for Treasury orthodoxy, had been compared to ‘the High Priest entering the sanctuary’. Perhaps it was there more in jest or even as a warning about the 1930s. Nick worked night and day to help us achieve the bank recapitalisation and was later to repudiate the main Tory argument about Labour profligacy, and state, correctly, that there was no substantive fiscal problem in advance of the crisis. But, as he himself acknowledged in a Financial Times article of 2017, he considered everyone far too soft on the deficit and debt. Britain, he wrote in 2017, ‘never experienced austerity’ in the way Ireland did and ‘there was a case for going further faster’.

  It is well known that in the spring of 2009 I discussed with Alistair Darling his role. When he was appointed chancellor, I had been upfront with him: I would want to make a change in the not too distant future. I explained that because I was older than the rest of the Cabinet, I would want us to go into the next general election with a younger, rejuvenated team. In the June 2009 reshuffle, I offered Alistair the choice of the other top jobs. He refused to move, and when Ed Balls then made it clear to me that he did not want to move either, I relented. In the shadow of the resignation of James Purnell – and an attempt to dislodge me – I accepted that the reshuffle had to be limited.

  What of the Bank of England? Labour governments traditionally had difficult relations with the Bank. Not just in the 1920s, under the austere governor of the day, Montagu Norman, who had taken us on and then back off the gold standard, but also under Harold Wilson. In 1964 Lord Cromer, the then governor, had told Wilson to stop building hospitals, axe the school-building programme and slash public spending, in an attempt to secure a balance of payments surplus and restore confidence in sterling. There ensued a very public row: Wilson complained about the ‘Gnomes of Zurich’, who, like Lord Cromer, were, he said, thwarting the will of the people expressed through the elected government.

  So, it did not bode well when Mervyn King went before the Treasury Select Committee in March 2009, just before the G20 which was planning a coordinated fiscal stimulus, to volunteer his objections to our stance. When in 2003, after the retirement of Eddie George, I sought continuity by promoting Mervyn from deputy governor to governor, it was a bold appointment because, unlike Eddie, he was not a ‘markets man’ but an academic. And when, in the early stages of the crisis, Mervyn argued against intervening to support the banks, before turning full circle and submitting to me a paper calling for outright nationalisation, I did not agree with him. But I accepted this advice was well within his remit as governor. However, was it right for Mervyn to decide to move outside his remit and become a public commentator, siding with our critics without even informing us beforehand?

  I did not do a Harold Wilson and publicly criticise Mervyn, even when on further occasions he volunteered advice on our fiscal policy without telling anyone in the Treasury or No. 10 in advance. Instead, after his intervention in March, I asked to see him in private. I reminded him that his predecessor and I had a firm understanding: I would not comment on monetary policy and he would refrain from weighing in on fiscal policy. Could independence work, I asked him, if a central bank charged with one responsibility started pontificating on another? Mervyn promised not to intervene again. But just three months later, not long after Alistair had announced a deficit reduction plan, Mervyn now called for ‘a credible’ reduction path to deal with the ‘truly extraordinary’ deficit. This was a direct attack on our policy. I write in more detail of the events of May 2010 in the next chapter, but we now know that Mervyn insisted that month’s inflation report call for ‘significant fiscal consolidation’ and a more ‘demanding path’ than had been set out in the Budget. We also know there was unhappiness within the Bank of England itself over what one member of the Monetary Policy Committee called ‘excessively political’ statements ‘in the context of the election’.

  During a revealing press conference in May 2010, Mervyn claimed it was his right as governor to comment publicly on the overall fiscal position because of its impact on monetary policy. Ironically that should have led him to my position, not his. Mervyn could have come to us with private advice that monetary activism alone could not achieve the growth and employment he was charged to help deliver, nor the 2 per cent inflation target. But that would have meant him conceding that a fiscal stimulus, not austerity, was the only way forward. He might even have argued, as some did at the time, that the Bank should create ‘helicopter’ money
to pay for a stimulus that did not entail additional public debt. Instead he gave the opposite advice: to end the stimulus and reduce the deficit as quickly as possible. The chairman of the US Federal Reserve, Ben Bernanke, has consistently argued that Congress’s failure to deliver a temporary fiscal stimulus made his task harder – Mervyn took the opposite view.

  I make this point to emphasise that Mervyn was thinking less about his remit as governor than his own personal attitude to debt. There are, as we proved, great benefits in having non-partisan experts setting interest rates, but it is a fundamental part of our constitution that the elected government of the day make decisions on tax and spending. If this was abandoned, in favour of an unelected Bank of England holding court on tax-and-spend and publicly trying to pressure the government, then there would be a popular reaction against elites that were out of touch. The constitutional position is that there should be ‘no taxation without representation’ – not ‘no taxation without the Bank of England’s say-so’.

  By the summer of 2009, Mervyn was echoing the relentless opposition cry – backed up by the right-wing media – that our primary concern should not be growth or jobs but the debt and the deficit. While we were solving one problem, we were being blamed for another.

  Of course, as our deficit reduction plan acknowledged, large budget deficits cannot go on forever. But it is counterproductive to withdraw fiscal support too soon. During these months when we were under pressure to withdraw the stimulus, I read two books, one given to me by our chief strategist in No. 10, David Muir: FDR: The First Hundred Days by Anthony Badger, and FDR by Jean Edward Smith, which showed that in tackling the Great Depression, Franklin Roosevelt’s mistake was to try to retrench prematurely. Too-rapid deficit reduction would undermine growth and ultimately result in a bigger debt – which is what happened after 2010.

  Our approach was to get the deficit down by bringing the economy back to growth without jeopardising essential public services. In that we benefited from low interest rates, while debt interest payments, at 2 per cent of GDP, were around half the level of the 1980s recession. Only when the recovery was secured did we plan to raise taxes – National Insurance by 1p in the pound in 2011 – and in a fair way: no one earning under £20,000, or any pensioner, would have paid more tax. Our Fiscal Responsibility Act, which came into force in February 2010, mandated that the Treasury must ensure that for each of the financial years ending in 2011 to 2016, public sector net borrowing expressed as a percentage of national income was less than it was for the preceding financial year. Under Labour’s plans, cyclically adjusted public sector net borrowing would fall from 8.4 per cent of GDP in 2009–10 to 3.1 per cent in 2013–14 – halving the fiscal deficit over the next four years. While higher than in recent decades, public sector net debt would be lower than for much of the last century.

  The economics journalist William Keegan – whom, long before I did, my father read in the Observer – has remarked: ‘There is an impressive weight of evidence that recovery had begun in 2010, thanks to the collective impact of fiscal and monetary measures known as “the stimulus”, but the recovery was aborted by the premature abandonment of the fiscal side of the stimulus.’

  It was to be an irony that by our prompt actions we lifted the country out of recession quickly, but many gave us no credit for it. Still, no previous British government facing recession had ever faced the popularising of counter-cyclical fiscal strategy as ‘driving the economy over a cliff’ with ‘money they didn’t have’. But this was the basis of the Conservatives’ argument that the only route to recovery was austerity.

  There are important economic and political lessons to be learned from what we did. The austerity argument, in the end, is founded on an orthodoxy that deficits and debt are always bad. The myth of good fiscal housekeeping is that each budget should balance. The comparison is drawn with families ‘living within their means’, ignoring the fact that most borrow to buy a home. The same is said of businesses, though they too borrow to invest. Britain has run a surplus in just seven years since 1970, four of them – 1998, 1999, 2000 and 2001 – when I was chancellor. In the same period, the annual average budget deficit has been 3.1 per cent of national income.

  The facts were on our side. I had also spent years in opposition and then government establishing our credentials for prudence. During our first two years, I had frozen public expenditure. Then I had taxed rather than borrowed to pay for NHS investment. I halved the growth rate of public spending after 2005. Going into the financial crisis we had lower debt than any other major country. In 2007, debt was 77 per cent of GDP in the United States, 68 per cent in Germany, 77 per cent in France, 115 per cent in Italy, and 174 per cent in Japan. In Britain, it was 51 per cent. Indeed the current balance deficit was 0.5 per cent and 0.6 per cent of GDP in both 2006–7 and 2007–8 respectively – hardly a large number.

  For a time, we had all-party support for our measures. In September 2008, the Conservatives signalled they would back the government’s policies to tackle the crisis: David Cameron phoned me from his party conference to say that he was about to announce they would back an all-party consensus. However, a few weeks later, George Osborne changed tack and suddenly compared the fiscal stimulus he had recently endorsed to ‘a cruise missile aimed at the heart of the recovery’. In the end, false and widely reported rhetoric about Britain going the way of Greece came on top of general distaste for debt.

  The Conservatives alleged that Britain was suffering less from a global financial crisis that started in Wall Street than from a national debt crisis caused by Labour profligacy in Downing Street. As the economic historian Robert Skidelsky has observed, the Conservatives ‘constructed a consummate political narrative that linked folklore economics (“the government can’t spend money it hasn’t got”) to the politics of blame (“cleaning up the mess left by Labour”) to the politics of fear (“the Greek bogey”) to grand economic strategy (“reducing the deficit is a necessary condition for sustained recovery”)’. It was all wrong and, once the Conservatives were in government, would be proved wrong.

  Previously the Conservatives had not only backed our spending plans but made additional proposals on tax that would have entailed an even higher deficit, so their new stance was quite clearly opportunistic. More importantly, given what happened to Britain’s economy after they took power in 2010, it was bad economics. Deficit spending, as Robert Skidelsky reminded us, is like pumping air into a deflated economy. Just as in the 1930s, extra government spending was urgently needed to bring idle resources back into use – this is how we propelled the economy back to growth by 2010 – and by increasing employment and growth, would pay for itself. But after the Tories took power, it would take nearly another six years for our economy to recover its pre-recession levels of output, a process that took only four years in the 1930s. The next seven years of austerity were ultimately to cost households £4,000 each and in some cases as much as £13,000. ‘One cannot stress how dreadful that is – more than a decade without real earnings growth,’ wrote the director of the Institute for Fiscal Studies, Paul Johnson. ‘We have certainly not seen a period remotely like it in the last seventy years.’

  The Conservatives needed a narrative that would justify austerity in spite of the lessons of history. So even while it was the crisis that had caused the deficit, the truth was inverted: it was the deficit that had caused the crisis, they claimed. Labour, it was now alleged, had created ‘a structural deficit’ as a result of persistent overspending. It had come about in part, they said, because we had underestimated the ‘output gap’, the difference between the actual output of the economy and its potential output. If an economy is growing faster than it ought to be, then higher than expected tax revenues – from, for example, City earnings and bonuses – reflect no more than a temporary and passing advantage and should be discounted. Our mistake, it was argued, was not to have realised that our revenue growth was only transient, and thus in failing to discount such revenues whe
n planning the public finances we had overestimated the sustainability of our revenues. In short it was, they claimed, our reckless overconfidence in the economy’s health, rooted in a desire to spend more and more, that had precipitated the crisis.

  Two years after we left office, the IMF and the OECD calculated with the benefit of hindsight that the entire global economy in 2007 had been growing above its sustainable trend rate of growth. In our case, they determined that the output gap had been 4 per cent – double the size that it had been calculated to be at the time by the Office of Budget Responsibility. This revision was used by the Conservatives to bolster their arguments and justify the ruthless surgery that would be required to deliver the long-term reduction in the public sector to which they had always been committed.

  But in the pre-crisis years just about everyone, including the IMF, had assumed not only the British economy’s but the entire Western economy’s potential for sustained growth, and its underlying productivity levels, to have been higher. Indeed, the Conservatives themselves had gone further than we did, claiming that the economy could afford not only our public spending programme but a programme of tax cuts too. In truth, the proper charge against us was not that we chose to spend too much in defiance of the evidence but that, like everyone else, we had failed to anticipate such a profound global recession, a failure not of profligacy but of prophecy. As the respected Oxford economist Simon Wren-Lewis has concluded, ‘It would be foolish to use the latest estimates of cyclically adjudged budget deficits to criticise policy at the time. It is equivalent to saying … [they] should have foreseen … the financial crisis itself.’

 

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