We reversed what seemed an inexorable rise in child poverty. Sure Start centres became a world-class model for providing support to young families, helping to improve children’s life chances. Tax credits, the minimum wage and the New Deal, through which government reduces unemployment by training job-seekers, were all measures that implemented core Labour values. Above all, unemployment fell and the number of people in work rose; and by providing tax relief for working parents, we made inroads into tackling the poverty that had cascaded down through the generations. Ours was a reforming government and, as David Cameron acknowledged in 2010, Britain was a better place than it had been thirteen years before.
A government, though, isn’t just about providing competent management, though that is essential. It has to be grounded in a core belief – in our case, in fairness and an aspiration to make things better for individuals and for the country as a whole.
There were areas where we did not get it right. Areas, too, where we got it wrong. We were not clear enough in our own minds about what needed reform and about what those reforms ought to be. We could have gone further in reforming the benefits system, particularly on disability and housing benefits. Those were put in place, with the best of intentions, often many decades ago and have not been adapted to the circumstances of today. The idea that there were people ‘out there’ who could work but didn’t and were living off benefits instead is corrosive in Britain’s politics. We made significant progress but more reforms were needed. Frankly, we did not face up to all the problems. But we did make significant changes to make work pay and to help families, particularly those with children. The setting up of the Jobcentre Plus network, with its emphasis on getting people into work, contributed to the fact that unemployment did not rise as much as might have been feared during the recession that followed the banking crisis. And we made significant inroads into reducing the rate of increase in the numbers of incapacity benefit claimants.
When I became Secretary of State for Social Security, I visited many dismal benefit offices with their thick protective glass screens and row upon row of shabby seats. This was no way to treat people, let alone encourage them into work. In the face of sometimes bitter opposition from the unions, every benefit office was transformed, the screens taken down, providing an environment where the question was no longer ‘What benefit am I entitled to?’ but rather ‘How do I get back into work?’
In the health service, where we did a great deal to improve outcomes, there are two areas in particular that remain to be resolved. We must get control of costs in a system where there is no incentive to do so; and we must figure out how to drive up standards in a system that can never operate as a free market. In education we drove up standards and built new schools to replace crumbling Victorian buildings and classrooms thrown up in the 1950s and 1960s. University education expanded and science investment doubled. Maintaining first-class education is essential for our future.
If we are to become a more successful and prosperous country, this level of investment must be maintained, and that requires the political commitment to make the investment and, crucially, to find the means to finance it. For the first ten years of our government, the economy grew for a more sustained period than it had in two centuries. We avoided the downturns experienced in other countries, including the US and Japan, and created the conditions that made us the world’s main destination for foreign investment. Business start-ups increased.
Although many people have argued that we should have spent less in the decade leading up to the crisis, very few – and virtually no one in British politics – were saying so consistently at the time. The Treasury is fiscally conservative and will always advise its ministers to rein in spending. But it is there to advise, and the Chancellor’s choices and judgements will prevail. By 2007, with public expenditure having doubled, I believed it was time to cut the growing rate of spending – which is exactly what we did. To assume that revenues would continue to flow uninterrupted from the sometimes volatile financial services industry was a mistake. When the crash came, there was no margin to fall back on. Our economy has become more lopsided and that is something to which we must address – though there is no easy fix.
There is a broader point about the economy that needs consideration. The political orthodoxy, from the 1980s to the present day, has been that government’s role in the economy should be limited to the macro level. From the time he became Shadow Chancellor in 1992, Gordon Brown overhauled our economic approach and as we approached the end of our time in office our view of the role of government had begun to change. Our experience during the crisis showed the difference that active government can make. We could have stood back and let the markets take their course, but that would have had disastrous consequences for the country as a whole. I do not understand how the Tories can argue that they would have let that happen. Surely it’s the job of government to step in when things go wrong?
Government can’t decree the extent to which our economy relies on the financial services industry as opposed to manufacturing – nor, indeed, the strength of our creative industries. But I do believe that targeted government intervention and support can make a difference. For example, research and development tax credits for the film industry were a driving force behind the renaissance of British cinema. Lower corporation tax and a better business environment are critical. The role of government is an important, defining difference between Labour and the Conservatives. The state is there to do those things that we as individuals cannot do alone, and we should not be afraid to acknowledge its role in economic development, in education or providing infrastructure, but also in other ways. Public spending is not a goal in itself. What matters is the result, what you get with your money, and how we help people to meet their aspirations and ease their concerns.
In September 2009, when preparing to deliver the James Callaghan Memorial Lecture in Cardiff, I was struck by Callaghan’s remark that ‘there is no better test of the character of a man than where he stands on the issues raised in the Beveridge Report’. Jim Callaghan, who served as Prime Minister between 1976 and 1979, was old enough to have seen the terrible impact of the Depression of the 1930s at first hand. The Beveridge Report, drawn up during the Second World War, set out the platform for what was to become the welfare state. Callaghan saw it as a ‘test of character’ whether or not the generation of politicians elected after the war could transform the lives of millions of people. Times have changed since then and the barriers to progress of 1945 have mostly been broken down. But there are new barriers and new challenges which are every bit as important. How do we sustain domestic growth and employment levels in a globalized economy? How do we tackle climate change? Here at home, how do we provide for an ageing population? Our test of character will be in how we respond to these questions.
In 1945 Clement Attlee’s government, which created the welfare state, understood the essential role of the state in addressing the big social challenges of its day. The big social challenges we face may be different but they are just as big. So too with the economic challenges we face. The economic crisis of the past three years has undoubtedly hastened the shift of power to the east and to the south. We cannot assume that the markets alone will ensure we remain able to compete and to produce goods and services that the rest of the world wants. The 1980s saw a shift in the paradigm of what a government could do – a reaction against the state planning and controls that had so dominated political thinking since the 1940s – to one of far less government intervention. Now, it seems to me, the paradigm needs to shift once more. Governments cannot ordain the exact size and shape of the economy, but they can and must influence that size and shape, in order to ensure that we capitalize and build on our strengths and recognize that targeted intervention can make a difference. As an example, the aviation industry in this country employs more than 100,000 people. Without government support for the development of Airbus, the industry wouldn’t be based in the UK. At a time when we
are about to procure a new generation of nuclear power stations, how do we ensure that this research and development benefits the British economy? Germany and France, who are supposedly bound by the same EU procurement rules as ourselves, have managed to ensure that their firms benefit from contracts to provide railway rolling stock. We depend upon free and fair trade, and I remain completely opposed to protectionist measures. This doesn’t mean that we can’t use government to promote jobs in this country. That is why we need to continue to invest heavily in education and science and to promote invention and innovation wherever we can.
That isn’t to say that only government can tackle these issues; it depends, too, on the efforts of millions of people. But the two must act in partnership, and one can’t exist without the other. These are the themes that the Labour Party needs to address. Between the ‘old left’ and the ‘old right’ of British politics, there is an ever-greater political middle ground, which we have to occupy if government is to make a difference. Government action is not a denial of freedom; rather, it is a way of increasing freedom, of supporting people to achieve their aspirations in a rapidly changing world.
To me, what matters is what works, whether it be in the public or the private sector. We should never forget that government is elected by men and women to act in their interests both as individuals and as members of a wider society. James Callaghan’s test is for all of us. We must constantly test the limits of what government can do best and where it should stand back so that public investment and private entrepreneurship can work in harmony. That was at the heart of New Labour, and for the party to move on and take back the country, it must be so again.
If we are to rebalance our economy, we will need to work closely with industry, not simply to provide the right environment for expansion but also to see where government can help. A good start might be to ensure that as we replace our ageing fleet of nuclear reactors there is some spin-off in terms of research and engineering coming to Britain. French and German industries have benefited from indirect government support and have reaped the dividends, particularly in Germany where the manufacturing base is the foundation of a strong economy. But it would be a mistake to attempt to achieve a better balance by shrinking our financial services industry. It employs more than a million people in the UK and makes a huge contribution to our economic output. It is crucial that government’s role in regulating the markets be pitched just right.
Any event as catastrophic as the banking crisis must leave behind lessons, ways that we can prevent recurrence and improve our common future. We should remember that the banks are only one part of this industry, albeit an important one. The insurance industry, fund management, accounting and legal services all provide a critical economic mass in both London and Edinburgh. London needs to remain one of the world’s major financial centres; I don’t think we can afford to be ambivalent about that or to give the impression that we wouldn’t mind if financial services went elsewhere. At a time when the world’s economic centre of gravity is moving relentlessly east and south, we must ensure that we retain our dominance in this industry, as we failed to do with our engineering expertise.
But here is the dilemma: a bank is very different from an engineering company. If an engineering company goes bust, the effects are felt by the firm and its employees and by the town or city in which it operates. If a bank fails, the ramifications will reach much further, as we witnessed in 2007 and 2008. If a series of banks goes down, the effects can be devastating. And because so many people depend on financial institutions for their savings and borrowing, the regulatory regime is critical.
It was David Hume who dismissed the idea that it is only reason that governs human behaviour, and it would be hard to find a sequence of events that better demonstrates Hume’s view than the illogical behaviour that drove bankers to cause the financial crisis. They didn’t understand what they were doing, the risks they were taking on, or, often, the products they were selling. At the height of the crisis, one leading banker told me with pride that his bank had just decided they would no longer take on any risk they didn’t understand. I think that was supposed to reassure me. It didn’t; it horrified me. The top management in banks both here and in the US failed to understand – or even to ask – what was apparently making them so much profit and what were the risks. Added to which, there was very little challenge from the regulators who were supposed to be supervising them. Sir Fred Goodwin told me, when he came to my home just before Christmas 2007, that he didn’t think the FSA understood his bank. I don’t think they were the only ones.
We must also ask why increasingly reckless lending was not checked by the boards of the banks. It can be very difficult to challenge the behaviour of someone you know and like, particularly when times are good and profits are soaring. But that is what boards are there to do. They failed miserably, not just in the case of RBS and HBOS but in banks across the world. I have always thought that while it’s understandable to ask searching questions when you are losing money, it is of equal importance to do so when you appear to be making a lot of money.
Regulatory bodies can’t stand in the shoes of directors. But they must ensure that the potential vulnerabilities of an institution are understood, and must act as the voice of reason in the face of the exuberance of directors chasing bigger profits. It is sometimes felt that regulators can never know enough about an individual bank, and that it would be better simply to require banks to hold higher capital reserves as a buffer against failure. However, I don’t think that is enough. What is needed is a combination of more capital and tougher regulation. Regulators need to make sure that bank boards are competent, that there are processes in place to manage risk, and that they are being followed.
I have never used the term ‘light-touch regulation’ because it seems to me to send the wrong signal. Regulation should be focused on where risks lie, but a ‘light touch’ implies precious little supervision and a lack of searching questions. That culture of sometimes lackadaisical supervision allowed a climate to development where too often regulators and boardrooms alike were happy to look away. If the music was playing, they were happy to keep on dancing. It was no different in any other country. What is essential now is to ensure that there is thorough questioning where it’s needed, and critically, international cooperation among regulators.
The regulatory system needs to be more intrusive and to focus on the key questions: what happens if a critical part of the system should fail; and if it does fail, how is that failure to be managed? In 2011, the coalition government is legislating to put in place a new structure, which will not come into force until 2013. Arrangements within the Bank are far from straightforward. In particular, it is necessary to decide who calls the shots in a crisis. That should be decided now. Even if the two principals charged with making the ultimate decisions were the Governor and the Chancellor, what happens if they disagree, as was the case in 2007, over whether to inject liquidity into the economy? The Chancellor might decide, as I did, that that is what the system needs; while the Governor might reach the conclusion that the matter is one of solvency and that more capital is required. The only way in which liquidity can be provided is through the Bank. But with recapitalization, only the Chancellor can give the go-ahead because the Bank does not have the resources to do it. The only way to ensure that a crisis can be adequately dealt with is to make explicit that the ultimate decision-making authority lies with the Chancellor.
If responsibility for supervision of the financial system, as well as responsibility for monetary policy, and for smoothing the economic cycle, lies with the Bank of England, then the governance of the Bank must change. The Bank is an autocratic institution, run by its Governor. It always has been. To invest so much power in one man or woman runs counter to any modern idea of corporate governance. The court of the Bank of England, to whom the Governor is in theory answerable, is an anachronism. I tried to reform it, but I now believe that what is needed is a proper board of directo
rs, both executive and non-executive, who will help the Governor form his or her view. He or she should be like the Prime Minister, first amongst equals. That is the only way to broaden the Bank’s decision-making base and is in keeping with modern corporate governance. All this must be put in place before the new Governor is appointed in 2013.
The risk is that the present and successive governments will lapse back into a false sense of security, believing that the mistakes of the past can never be repeated. The report of the government’s Banking Commission calls for more capital and for firewalls between various bank activities. That is all very sensible, but I don’t believe it will stop another crisis. We have to face up to the fact that the banking system – and here we should include insurers and other institutions – is now so interlinked that regulators cannot discharge their duties as if each institution were free-standing and self-sufficient. This was brought home to me after a cursory examination of what was happening at Northern Rock in 2007. It is vital that we get this right. Our economy needs the industry, but we need to know at all times what the consequences might be should something go drastically wrong. Risk needs to be better managed at all levels, and regulators worldwide must work more closely together.
It is inevitable in reviewing the history of our government that the relationship between the chief architects of New Labour, Tony Blair and Gordon Brown, should be minutely examined. That is not my purpose here, but to write the history of Labour’s time in office two things have to be acknowledged. We would never have won so convincingly in 1997 without their combined efforts. Tony Blair was an unusual leader of a political party. He was curiously semi-detached from the Labour Party – certainly never truly of it – and perhaps because of that he was able effectively to lead us into the centre ground and keep us there. The economic groundwork, though, the shedding of old shibboleths and dearly held prejudices, fell to Gordon Brown. He was ruthless in reshaping and rebuilding a party whose economic policy had, even in the early 1990s, been forged three decades before. He deserves immense credit for that. Unfortunately, however, and especially towards the end, their deteriorating relationship and the increasing stridency of their disagreements destabilized the government and did great harm to our reputation, which it will take some time to restore.
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