To compensate for that and ensure that we retained credibility as possible, the Budget figures I prepared assumed a 5 per cent drop in our economic capacity, which would be permanent. It wasn’t picked up by commentators at the time, but the people who buy our government bonds certainly noticed, and it did help our credibility in their eyes. Unfortunately, if the capacity of the economy is assumed to have gone down, the structural deficit gets larger. There was one further measure that we took and that was to make provision for losing up to £50 billion following the bank bail-out. In the event, we didn’t need to call on any of it and it came out of our calculations the following year. However, it did help reassure investors and the credit-rating agencies that we were being cautious, even if the headline growth figure in the later years of the forecast was optimistic.
Then there was the question of borrowing. I proposed to announce that we would halve the deficit over a four-year period. It would be tough, but we would be able to protect the health service, schools and policing. For me, this provided a credible plan which would allow us to cut borrowing without damaging the economy and would stimulate growth. Although I didn’t think carrying out a complete spending review now, when things were so uncertain, would be a good idea, I did want some examples of things we were prepared to cut. I could see, though, that there was no appetite for this in No. 10. I would have to return to this argument in the run-up to the pre-Budget report later in the year.
Clearly, we could not say that we would invest and the Tories would cut. What I wanted was a realistic position that capitalized on what we had done so far, but charted a clear way back to recovery. By accepting the need for cuts in spending, we were only doing what everyone knew we would have to do. I thought the argument that, in the teeth of Tory criticism, we had prevented the banking collapse, stopped the economy sliding from recession into depression, and now had a credible plan to bring down the deficit at a sensible pace, was one we could run with. We knew the Tory position would be to use the cover of high borrowing to make significant and rapid cuts in public spending for ideological reasons.
However, the discussions with No. 10 focused increasingly on the question of tax. I tried to run my idea of increasing VAT with compensating measures for people on low incomes, again without success. I was extremely worried about putting up income tax again so soon after I had announced a new top rate of 45 per cent for people earning over £150,000. But we needed to raise more money, so I would have to increase that rate to 50p and bring it in a year earlier than proposed. And, because I couldn’t put up VAT, I would have to raise National Insurance by a full penny, not the 0.5 pence announced the previous autumn. It would still look like a tax on jobs. The increase to a 50p tax rate for top earners, and the big increase in National Insurance, changed the dynamics of the political debate. This was on top of other measures, including restricting the personal allowance available to top rate taxpayers. It was a major change in approach from the past ten years, a big rise on taxes on income. I was prepared to justify it, but was in no doubt about the flak we would receive.
There were times when I thought Gordon was willing to entertain the VAT alternative, but he was persuaded by his advisers that National Insurance was a better tax. It would not, I was told, be seen as a ‘tax on jobs’. My concern was not only that it would be seen as just that, but that the messages we were sending would mean the loss of a crucial constituency that had helped put us into power in 1997 – that is, business. We had demonstrated that we could achieve one of the longest periods of growth this country had seen. We had made the right calls in the banking crisis when the Tories were at sixes and sevens. We were now running the risk of losing all that confidence and support. The negative message we were sending out on aspiration contradicted everything we had argued for over the past fifteen years. We needed to be not only consistent but confident in our arguments.
Although Peter Mandelson was to be hugely supportive later in the year, at this stage he sided with the argument against raising VAT. As Business Secretary he was more focused on a growth package, and for political reasons he remained reluctant to side openly with me against Gordon. Quite simply, no minister, even the Chancellor, can insist on a controversial move if his senior colleagues are dead against it. Peter, in his memoirs, published shortly after the general election of 2010, says he regrets the position he took. So do I.
Once these crucial issues had been thrashed out, we easily agreed on measures to help with the recession, particularly the scrappage scheme aimed at boosting car manufacturing and sales, which allowed people to receive cash for trading in an old car in return for a new one. This proved to be successful out of all proportion to its cost, which was minimal. I extended the stamp duty holiday; and there was also assistance for mortgage payers and, critically, a programme to create jobs for eighteen- to twenty-one-year-olds, which Yvette was especially keen on. Youth unemployment is one of the most destructive of forces, as we had seen in the 1980s. It is vital that a young man or woman should not find that their first experience in the grown-up world is unemployment. The terrible legacy endures down generations.
Forty-eight hours before its presentation, we had no Budget. It’s a tribute to the Treasury team that they worked through the night to get the thing done. It wasn’t new to them. Gordon had always worked like this: someone had told him early on in his time as Chancellor that he didn’t have to print it three days in advance, and he’d taken this as carte blanche to take his time. The tension levels are extraordinary, and this Budget was the worst of my time as Chancellor. I can’t overstate how important a Budget is, and we were rewriting it literally until the last minute. Most of the staff were in the Treasury, rather than at No. 11, so it was simplest to work there. I’d be called time and again to No. 10 for a meeting, and we’d all know that this meant further changes. There was nothing for it but to be stoical. I vividly remember a speech Gordon made while we were in opposition, the famous ‘neoclassical endogenous growth theory’ speech. He started speaking as the second half was still being written. Halfway through, a hand appeared from behind a curtain and handed him the rest of the speech. This exemplifies Gordon’s approach to working on such matters.
The evening before the Budget was to be presented, No. 10 staff began bombarding me with endless suggestions for rewriting the speech, which I ignored because none of them seemed to improve an already difficult presentation. As for the growth forecasts, they finally emerged as being not much different from the ones I had originally proposed. If they were wrong – and those for the later years were – the fault was mine, not Gordon’s. In the end, the Budget was only really signed off when I left for the House of Commons, because no one could change it after I had got into the car with Karl Burke, my driver.
The tax rises and the borrowing forecasts were to dominate the headlines after the Budget was finally presented on 22 April 2009. The coverage could not have been worse. The government was on the ropes. I was forecasting that the economy would shrink by 3.5 per cent in 2009. Because of that, borrowing would rise to £175 billion in 2009, some 12.4 per cent of GDP. The fact that it was expected that the US deficit would be 13 per cent of GDP provided no comfort. Nor did my forecast that borrowing would fall thereafter. Debt, which included the costs of stabilizing the banking system, was then thought to be rising to 79 per cent of GDP in 2013/14. If the government had been on a surer footing, and if we’d had time to prepare the ground, it is possible that we might have had a slightly better reception. Our backbenchers were lukewarm. On the Tory side there was much to cheer. They saw their opportunity and they seized it. Their central allegation was that we were not telling the truth.
Next morning I sat in the departure lounge at Heathrow waiting to fly out to the annual IMF meeting in Washington, reading headlines that were as bad as they could be. The combination of massive borrowing, growth forecasts that were not believed, and a lack of a clear plan to get borrowing down was a lethal combination. What’s more, just before t
ake-off I received the latest estimate for growth for the first three months of 2009, published by the Office for National Statistics (ONS). The ONS publishes the statistics on a rigid quarterly cycle. Because the Budget was late this year, due to the G20 and the parliamentary recess, it came just ahead of the next round of ONS data. The trouble was that the ONS estimate was much worse than we had expected. It was only their first estimate. Usually the Treasury has a fairly accurate idea of what the ONS will say, but this time it was lower than we thought. In the end my estimates turned out to be right, because in fact the economy grew more strongly in the fourth quarter than anyone had expected, but this was far from clear in April 2009 and our opponents had a field day. It immediately cast doubt on my forecast of growth for the next year.
Earlier that day I had done the usual media round and made what I felt was an aggressive defence of what we were doing. We still needed to support the economy. Indeed, the decisions I took in the pre-Budget report in 2008 and in the Budget of 2009 were largely the reason why the economy grew more strongly than anyone expected in the summer of 2010, why borrowing came down faster than I had predicted. The problem is that we had lost the high ground. And I still believed that changes in VAT, with measures to compensate the low-paid and a plan to protect key public services, such as health and schools, but with a signal that we would do something about spending elsewhere, would have been a stronger and more compelling argument. Above all, it would have been believable. Credibility has to be central to any economic and political strategy.
An escape to Washington was welcome. This year’s IMF meeting did not have the same urgency or tension that had characterized the previous year’s gathering. Nor was I troubled this time by calls from No. 10. Tim Geithner and I were focused on how to bring the promises made at the G20 summit in London to fruition. On a gloriously hot spring afternoon, London felt a long way away. The pressure-cooker lid lifted a little. I took time to explore a bit of Washington, climbing the hill at Arlington Cemetery to visit the grave of John F. Kennedy, something I had never managed to do on previous visits.
Kennedy took office in 1960, at a time of what he described as ‘national peril’, in the wake of a recession, seven years of diminished economic growth, when business bankruptcies had reached their highest level since the Great Depression. The candid words of his first State of the Union address, on 30 January 1961, still resonate. To state the facts frankly, he said, is not to despair of the future nor to indict the past. The prudent heir takes careful inventory of his legacies and gives a faithful accounting to those to whom he owes an obligation of trust. The job of elected officials is to face all problems frankly and meet all dangers free from panic or fear. His words reinforced my resolve. Back in London early on the Sunday morning, I was glad I’d taken time out for a history lesson. In view of the panning it had received, the Budget was hardly the backdrop we wanted for the elections to the European Parliament in a month’s time.
Britain’s standing in terms of being able to pay its way was never in doubt, but there was always the possibility that one of the credit-rating agencies would change its assessment of our ability to repay. There are three credit-rating agencies – Standard & Poor’s, Moody’s and Fitch – which have assumed a far greater importance than they deserve. These bodies were, after all, happy to rate sub-prime mortgages as AAA, the top classification. Some of them had a clear financial interest in doing so. They were paid to certify the products by the very banks they had to rate.
Every government borrows money from the markets, which in this context means entities such as pension funds, which need to invest in government stocks to provide them with a stable income. Many others will be people with money to invest, who do it as a commercial proposition. They invest in companies, other financial institutions and government bonds. Everyone is looking to make a turn on the money they have. What a government pays on its borrowing depends not just on the going rate of interest, but also on the risk of default calculated by investors. One of the guides investors look at in making this decision is what classification has been given by the credit-rating agencies. In some ways this is nonsense. A pension fund should have a pretty good idea of the difference between the US government and that of some dodgy dictatorship. But it’s a fact of life: people look to the rating agencies. Treasury officials routinely talk to them, as they do to the people who buy government bonds. It is often a difficult conversation, and they have to be taken through all the Treasury’s calculations, including a realistic assessment of our loss of productive capacity and provision for any banking losses. I was very conscious that these investors and the credit-rating agencies follow what senior ministers say very closely. Any suggestion that we weren’t committed to getting borrowing down after the recession could be fatal.
In the early evening of Wednesday, 20 May, Dan, my private secretary, came into the study in Downing Street to tell me that one of the credit-rating agencies, Standard & Poor’s, had decided to put us on ‘negative watch’. This is not a downgrade, but rather a warning. I was determined that, come what may, Britain’s credit rating would not be downgraded while I was Chancellor. It would have been a political disaster, along the lines of going cap in hand to the IMF in 1976, or Britain’s humiliating expulsion from the exchange rate mechanism in 1992.
I walked through to Gordon’s office and told his staff I had to see him urgently on a private matter. I knew he was hard at work on his speech to the Confederation of British Industry that evening, but this couldn’t wait. He too could see how serious this was, and we agreed that in his speech to the CBI he would emphasize that we would do nothing to jeopardize Britain’s position and that getting borrowing down was our absolute priority. Some weeks earlier I had said, when giving evidence to the Treasury select committee at the traditional post-Budget hearings, that not only was I committed to getting borrowing down but, if things proved better than we expected, we could move even faster. That had helped. The rates that we had to pay to raise money had fallen on the back of it.
We now ran into political difficulty which further undermined us. At one of the weekly sessions of Prime Minister’s Questions after the Budget, Gordon began to run his argument of ‘investment against cuts’. It was the first time I had heard his argument mounted in public and it was virtually impossible to run it now, when a look at the official Budget publication, known as the Red Book, showed that we were committed to quite substantial cuts in public spending.
This exchange was repeated the following week, by which time David Cameron actually had the Red Book in his hand. The Budget was based on protecting some departments, but making cuts in others. It allowed the Tories to portray the argument not as ‘investment against cuts’ but honesty against dishonesty. For the first time, Gordon and I had some very angry exchanges. He told me I was undermining him and it had to stop. I certainly was not, I said. Why would I do that? Didn’t he understand that I was trying, desperately, to give him, the government, a realistic platform on which to go forwards? I told him we could not continue to argue a case that did not stand up. The evidence was there for all to see.
A growing number of Cabinet colleagues told me that they could not understand how we had got ourselves into this position. Most of them were by now arguing for the more pragmatic approach that I took. Whether the ‘investment versus cuts’ argument was or was not a good idea, it should have been discussed. As it was, it became very apparent that most of the Cabinet did not believe in it.
It was at this time that the whole of Westminster became engulfed in the expenses scandal, when the Daily Telegraph published over a million pieces of paper containing minute details of every item of expenditure claimed by MPs for the previous five years. MPs are reimbursed for travel costs to and from their constituencies, for the cost of maintaining a second home, either in their constituency or in London, and for the costs of running an office, including staff salaries. The problem was that many of the rules were wide open to interpretation, and in some
cases flagrant abuse. The system of requiring receipts was lax and the House of Commons’ administration of the scheme left much to be desired.
One of the constitutional highpoints of the Labour government was said to be the introduction of the Freedom of Information Act. Now it came back to bite MPs with a vengeance. After years of trying to prevent publication of detailed claims, it was eventually ruled that they had to be made public. Had everyone’s expenses been published at the same time, there would certainly have been a public outcry and justifiable anger. The fact that only one newspaper got hold of the information and was able to drip-feed it, day by day, week by week, meant the impact was devastating.
For some weeks before publication, talk in the corridors of Westminster was dominated by foreboding about what might be revealed. This was one of those occasions on which the fear underestimated the reality. The Telegraph began by looking at the Cabinet and then it went on to more junior ministers. It did not get to the opposition front bench for four days and in that time, although it was a political problem for every party, it came to be seen very much as a government problem. Governments always take the blame when things go wrong – and this was no exception.
For weeks on end, expense after expense was detailed. Day after day, the effect was to traumatize not just the government but every MP, who awaited a call from the Telegraph or their local newspaper over some aspect of their expenses. Virtually no one was spared. Anyone in politics has to get used to answering difficult or awkward questions about policy. The close questions we were now being asked went to the heart of our personal integrity. It is this that made it so unpleasant and uncomfortable.
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