Back from the Brink

by Alistair Darling

  At this stage I had not turned my mind to the finer details. Before that, I would need to get Gordon’s agreement in general terms, and that is where the problems began. The pre-Budget report in 2007 and the Budget in March 2008 had to a large extent been discussed only between myself and Gordon. Apart from talks on individual spending items, we were the only two Cabinet ministers who sat down together. The pre-Budget report set for the coming November was different in that Peter Mandelson, who had returned to the government in October, sat in from time to time. I think he was preoccupied with trying to bring order to the No. 10 operation. He was also acutely aware that he and Gordon had renewed their relationship after years of acrimony. He wanted to bolster him and maintain harmony. For these reasons, it would have taken a lot to get Peter to side with me against Gordon.

  The Budget has to be the Chancellor’s. It can’t be cobbled together by committee. However, the general principles underpinning the Chancellor’s approach can easily be the subject of wider political discussion, certainly among senior ministers. Unfortunately, right from the inception of New Labour, and throughout our time in government, such an approach had never been adopted. The result was that senior ministers who were needed to go out and bat for the government at critical times were not involved in the decision-making process, as they should have been. As it was, throughout my Chancellorship, I often felt that I was having to engage in a pitched battle with Gordon. He had one ally, Ed Balls. I had no one, because no one else was engaged in the discussions. It was not until the following summer, of 2009, when the growing crescendo of concern among members of the Cabinet became impossible to drown out, that they started to be listened to.

  Before that, Cabinet members had to content themselves with voicing their concerns to one another and to me. Most of the Budget discussions, from mid-October, were conducted between Gordon and myself, occasionally with officials present, more often not. Gordon did as he always does and took advice elsewhere, not surprisingly from Ed Balls. I had no difficulty with that. But we needed to reach agreement one way or another, and it would have been far easier had we all been in the same room. This was especially so on the discussions over VAT, which is a totemic issue for some of my colleagues. I knew Yvette Cooper was against an increase beyond 17.5 per cent, because she told me so. I knew Ed Balls was against it, because I had heard him say so many times in the past. It was not clear to me precisely what Gordon thought. He did not actually say no to my proposal, but neither did he say yes. Over the next few weeks, we had numerous meetings in which he would sit and listen to what I had to say, ask for more information, and say we needed to meet again. It happened time and again, and all the while the clock was ticking towards that date upon which I had to deliver the pre-Budget report.

  It was exasperating, because until the Budget strategy was decided I could not possibly work out the detail, and it is the detail that matters as much as the general approach. I kept asking: ‘Why don’t we sit down together, everyone with their different views, and at least come to a decision?’ That didn’t happen until the very last minute, when Ed joined us for one meeting, to reinforce Gordon’s view that we couldn’t increase VAT in the way that I wanted. So I found myself outnumbered. Gordon, Ed and Yvette were opposed, with Peter unwilling, I thought, to cross Gordon on this.

  The real problem, so far as I could discern it, was that to some of the Prime Minister’s closest advisers VAT had a special political significance for us. From 1992, Gordon had masterminded a highly successful campaign against John Major’s Conservative government, largely based on their attempt to put the full rate of VAT on gas and electricity. The weekly taunts of the ‘twenty-two Tory tax rises’ imposed after Black Wednesday, when the Tories had earlier promised not to increase taxes, was highly effective. Alliteration required there always to be twenty-two tax rises. When they came up with another tax rise, we would drop a corresponding one off the list to make sure there were only twenty-two. I think it was because of this that Gordon had come to the view that for us to put up VAT, even in a completely different world, would be lethal. He dispatched one of his pollsters to test the water. As was to happen subsequently when he was asked to test something Gordon did not like, this particular pollster declared the policy to be deeply unpopular. That wasn’t surprising. I have yet to come across a tax that is popular with the person who pays it. The only taxes that are popular are those perceived to be paid by someone else.

  The whole process dragged on until a few days before the pre-Budget report, which was now fixed for 24 November. Unfortunately for me, the same opinion polling had apparently discovered that a tax on income, including National Insurance, was more acceptable. I was doubtful that this was the case. What worried me about a rise in National Insurance was that it would immediately be branded a ‘tax on jobs’ – and this is what came to pass during the 2010 general election. At a time when our defining purpose was to protect jobs in the teeth of a recession, this didn’t seem right, even if it were not due to come into force until 2011. Never mind the economics, in my view the politics were wrong and we would pay a heavy price for it. It finally became clear that Gordon was never going to agree to a VAT increase. Reluctantly, I had no option but to announce a 0.5 pence increase in National Insurance contributions, paid by both employees and employers. To compensate, I made permanent the emergency rise in personal allowances that had followed the abolition of the 10p rate. The effect was to give all basic rate taxpayers a further £145 to help balance the National Insurance increase.

  I had another difficult decision to make. It was one that had a profound impact, far wider than the Budget arithmetic, and it concerned the higher rate of income tax. To raise it would be to cross the political Rubicon for New Labour. Since the early 1990s, Gordon and Tony had worked tirelessly to re-establish our reputation not only as being economically competent but also as understanding the modern world. We wanted to ensure that we anchored ourselves in the middle ground of British politics; that we recognized the need to be fair, but also that we wanted people to get on. We needed to embrace not just equality but also aspiration.

  That is largely why the Labour Party, in opposition and in government, was determined not to increase either the basic rate or the top rate of income tax. We had made that specific promise in every election since the birth of New Labour. For ten years we defended a top rate of 40 per cent. We were also conscious of the fact that increasingly there was likely to be tax competition. I don’t believe that if you raise the top rate for a short time people will pack up and leave the country, but in the longer term tax rates do influence some people’s decisions as to whether or not they will stay here. And the evidence shows that the higher the tax rate, the greater the risk of tax avoidance.

  There is also a more general political point. No one likes taxes, but increasing taxes on income will always be unpopular. People know that they have to pay taxes to fund the things they use every day, like schools and hospitals. But raising income tax rates is, in the political jargon, toxic. This is particularly so, I believe, for people on low incomes without families, who have no access to tax credits. Those were the voters who deserted us, alienated by the idea that we were doing nothing for them, in 2010 and in the Scottish and local elections of 2011.

  However, there is no doubt that raising the top rate does bring in valuable additional resources. For me, the decision to raise the top rate of tax was a difficult one. For ten years, like everyone else, I had defended the top rate of 40p. What’s more, even though the increased rate was not going to come in until the end of the Parliament, it would be breaking the spirit of what we had promised in our manifesto in 2005. I was worried, too, about our doing anything that would move us from the centre ground of British politics, a place where Labour must stay if it is to be re-elected. But against all that was the pressing need for revenue to get our borrowing down once we were through the crisis. If we were to do that, it was not unreasonable that those who had done pretty well over the pre
vious ten years should make a contribution. Reluctantly, then, I decided to increase the rate paid by people earning more than £150,000 to 45 per cent. Since we were asking everyone to shoulder an increased burden, fairness dictated that those at the top should make a larger contribution.

  There was some argument about whether we should state that this was to be a temporary increase. I could just imagine the laughs in the House of Commons. Income tax, when it was introduced in 1798 by William Pitt the Younger to pay for the Napoleonic Wars, was intended to be temporary. However, both Gordon and I subsequently made it clear that this was something we had had to do because of the critical circumstances we were in. It was not a change in our political view concerning the top rate of tax. It would be reduced when circumstances allowed. That was my view then, and it remains my view today. Every tax system must be fair and be seen to be so, but it must also encourage aspiration and enterprise. We were in an extremely difficult position, and, as events were to prove, the 45p rate was not enough.

  I was to come back to the question of VAT during the preparation of both the Budget in 2009 and the pre-Budget report later that same year. In the meantime, just days before this 2008 pre-Budget report, I had to get on with what we had. Its centrepiece was a £20 billion boost to the economy, largely paid for by increases in income tax at the top end and a smaller increase from the 0.5 pence rise in National Insurance. This was, if you like, an old-fashioned redistributive Budget. It represented the largest change in tax and spending since 1997; I think it amounted to more redistribution than all of Gordon’s budgets put together. But it was necessary, and it worked. In addition to the new top rate of tax, I also restricted the allowances available to people earning more than £100,000, and began to remove the tax relief that top-rate earners could claim for pension contributions. I was also careful to ensure that, despite the National Insurance increase, no one earning under £20,000 would pay more.

  I also had to deal with the vexed question of public spending. The spending review that I had announced twelve months earlier had only come into effect in April. I did not want to revise it after such a short time when so much was so uncertain. Anyway, I was not enthusiastic about looking at specific cuts in spending at that stage. Things were so uncertain that we would probably end up making decisions that would have to be changed in a few months’ time. I had already cut the rate of growth in public spending during the previous year. In the March 2008 Budget, after much discussion, I had planned for annual growth in spending of 1.8 per cent, after the current spending period ended in early 2010. Now I cut it again, to 1.2 per cent growth. This was very tight but, in my view, manageable.

  There were two further measures I introduced. The first was to give taxpayers who were facing difficulties more time to pay their tax bills. This prevented a lot of bankruptcies; it proved to be an extremely popular measure and it endures to this day. It also meant that the Revenue collected more than it would have done, since by pressing for a repayment it had pushed firms into bankruptcy. I also increased the state pension by £4.55 per week and brought forward the increase in Child Benefit from April to January.

  It was a good package overall, but because Gordon and I did not reach agreement until close to the end, it was impossible to develop a political strategy for handling the media coverage. Attention focused on the forecasts, particularly that I expected us to enter recession for the first time in fifteen years, and that borrowing would peak at £118 billion in 2009. What’s more, I forecast that debt would rise to 57 per cent of national income by 2013/14.

  On top of that, nearly every single item in the pre-Budget report was systematically leaked in the days preceding its announcement. In fact, there was virtually nothing new to announce on the day except the National Insurance increase. The centrepiece of the pre-Budget report was meant to be the VAT reduction. Its leak to a Sunday newspaper allowed everyone who was against it to denounce it before it was formally announced. In any event, what I believed to be an excellent measure was trashed before it got off the ground. It is almost impossible to find out who is responsible for leaking information. I have never known a leak inquiry that found the source. There is no point in speculating: it could have been a Tory mole, I always suspected that they had one. Looking back, most people now agree that the VAT reduction was a success, even some of the shopkeepers who argued that it would be far too difficult for them. Along with other measures, such as bringing forward some building and engineering works, it helped carry the economy through 2009 and back into recovery at the end of the year.

  There was one more event that autumn that was to prove critically important to us, and to many other countries, and it was to be made possible by an unlikely ally in the economic battle. For some time, Gordon and I had been considering how we could harness the efforts of the world’s largest economies to try to avert the looming catastrophe. The banking crisis was most acute in the US and Europe, including the UK, but the downturn had spread much further, hitting both Asian and developing economies, including China, India and those in South America. The sub-prime crisis had shown how a problem in one part of the world could infect the entire system within months or even weeks, not years as in the past. The IMF was forecasting that world growth would stall for the first time since the war. We believed that collective action could put a brake on a momentum that might tip the world into deep recession.

  The previous November, when I was in South Africa, we had agreed to take on chairing the meeting of G20 finance ministers and central bank governors. Our term of office was to start in January 2009. Until that time, the G20 had been a low-key gathering of finance ministers, which did not include heads of government. It had not even been a regular fixture in Gordon’s calendar when he was Chancellor. The G20 had been set up by the Canadians in 1999 to try to engage the large developing economies which were excluded from the more elite G7 group. It had no democratic legitimacy, and was a fairly ad hoc arrangement. Spain, going by the size of its economy, should have been in the group, but it wasn’t because there were thought to be too many Europeans. South Africa was the only African country, and the representation from Asian countries was low.

  However, what we saw in the G20 was the possibility of a platform for action across the world’s economies. Gordon, in particular, with ten years’ experience of finance ministers’ meetings, could see the opportunities. If the world economy was to recover, no one country could do it alone. On the other hand, if every major economy did the same thing, that might provide the jolt that was needed. However, nothing would happen unless heads of government, prime ministers and presidents, were involved. Many finance ministers are primarily technocrats, advisers to their leaders rather than politicians. I was once at a dinner of finance ministers and it became apparent that I was the only one who was an elected Member of Parliament. One of my colleagues asked me: ‘How can you take the big decisions if you have to think of the voters?’ My reply was: ‘How can you take the big decisions if you don’t?’

  Gordon had a good working relationship with President George W. Bush, which he’d worked hard at since becoming prime minister. He convinced the president to convene such a meeting in Washington. Gordon reckoned, rightly, that an invitation from the president of the US would be difficult to turn down, and so it proved. It is to President Bush’s credit that, even in the dying days of his administration, he was prepared to engage in a lot of heavy lifting to get this gathering under way. It was just two weeks after President Obama had been elected, although he was not yet in office. We hoped he might be there, but understandably he was of the view that there could only be one president at a time.

  The meeting was fixed for Saturday, 15 November, in Washington, only ten days before I was due to present the pre-Budget report. The flight out allowed me time to finalize the countless minor decisions that go into these reports and to begin work on my speech. After six hours of mulling over endless numbers, I searched in vain for a film to watch to fill the last couple of hours be
fore landing. The sound system was an ancient one, and the choice was very limited. For thirty years I have managed to resist the temptations of Abba but it was either Mamma Mia! or back to the pre-Budget report. Now I succumbed and chose Abba. It did help me decide on one of my Christmas presents for Margaret who, like me, loved it.

  On the Friday evening, President Bush held a reception at the White House. The leaders were in one room, finance ministers in another. The idea was that much of the legwork needed to reach the right decisions could be done that evening over dinner, before the more formal meeting next morning. Gordon had flown out a couple of days earlier, but we met briefly at the splendid British embassy on Massachusetts Avenue. This Edwin Lutyens house is one of a number of embassies that proclaim Britain’s stature abroad, even though at home the Treasury periodically embarks on a vain attempt to sell them off.

  We set off in a cavalcade from the embassy. Because Gordon was the prime minister, he and his security entourage were looked after. Why there were so many cars I don’t know, but Gordon’s retinue filled them up rapidly. I eventually found a car at the end of the procession. We got to the White House drive and Gordon’s car stopped outside the front door, so he could walk up the red carpet and be photographed by the world’s media. The White House and its drive are much smaller than people might think. My car, at the end of the queue, was still out in the street. I had to argue my way past a heavily armed police officer, walk up the drive, weaving between cars, and through the crush of photographers, to get to the door. By the time I arrived at the front door, it was closed. They were not expecting anyone else from the British delegation. I had to knock on the door of the White House to be allowed in. There was no sign of Gordon, but there was President Bush ready to welcome the next guest. ‘Hello there, Alistair, how are you doing?’ he said. I was amazed at the man’s memory. I’d had one conversation with him before that, in the summer, at a formal dinner in Downing Street. Bush has an easy charm. His politics are not mine, but those who characterize him as a bit of a dolt underestimate him. He had an astute reading of the situation we were in, especially of the politics of the next twenty-four hours, if not, perhaps, a grasp of the finer points of detail. A few weeks earlier the finance ministers had been invited to meet him in the White House, early in the morning. He congratulated everyone on our work and assured us: ‘You folks don’t need to worry. Hank’s got a handle on this. He’s going to freeze that liquidity.’