Cameron works closely with Osborne and Hague in making the final switches required for coalition. Hague himself becomes First Secretary of State. The Conservative Cabinet appointments see very few surprises; one is Theresa May to Home Secretary, an appointment that brings tears of joy to her eyes. The appointment of Iain Duncan Smith to Work and Pensions Secretary is another surprise as he hadn’t held a portfolio in Opposition, though he had made it clear it was the post he wanted. Finally, it is a surprise that Chris Grayling is not offered a Cabinet position (though he later joins in September 2012 as Justice Secretary).
The decision to have a small-scale Number 10, attributable to Letwin, causes some consternation. Letwin looks back fondly to his time in the Policy Unit in the 1980s when Downing Street was regarded (not always correctly) as operating very effectively under Thatcher. Two factors were in their minds. ‘Because tensions between the prime minister and Chancellor had gone on for decades and were endemic, we wanted the whole of Number 10, Number 11, the Treasury and Cabinet Office facing in one direction. We knew the money would never be controlled properly if we were not absolutely sharing the same overall strategic direction,’ recalls Letwin.30 Avoiding Number 10 breaking up into a series of sub-units, all pulling in different directions, was another concern. A small PM’s office was thus considered by some to be much more biddable. Others understand that a strong Number 10 is necessary for the delivery of policy. In the months leading up to the election, Hilton and Rohan Silva spoke to some of the key New Labour figures, including Blair (twice), his chief of staff Jonathan Powell, head of policy Matthew Taylor, and speechwriter Phil Collins. They all said that Number 10 should remain big, advice that was ignored. Various Labour-devised units to enhance policy implementation, like the Delivery Unit, are promptly closed down in Number 10. Cameron will be a trusting, ‘hands off’ PM: why does he require a large office at the centre? But he soon realises he has been hasty to throw the baby out with the bathwater. He is critically short of capacity at the centre. The Policy Unit is thus expanded again from 2011, partly as a result of the patient chivvying of Jeremy Heywood, who repeatedly points out that Number 10 is not fit-for-purpose. But the inner circle around Cameron does not scale up: it remains small and tight. There are real gains from this, not least cohesion. But its social exclusivity is a source of irritation and anger which is to rebound on Cameron all the way down to the general election in 2015. Do they have the experience, the breadth and the stomach to master the maelstrom of political, social, military, security, economic and diplomatic challenges that are about to be hurled at them?
FOUR
Delivering Plan A
May–October 2010
Cameron’s first twelve weeks in power are dominated by economic concerns. He and George Osborne had carved out Plan A over the preceding year and a half. They now have to enact it.
Since being appointed shadow chancellor in May 2005, Osborne had observed the operation of the Treasury carefully, looking with alarm at how he believed Gordon Brown had denuded it of some of its best people. In the long run-up to the general election, Osborne and his then chief of staff Matthew Hancock held conversations with Nicholas Macpherson and other senior Treasury officials. They regarded Macpherson as ‘Gordon’s man’, and their initial impressions were not positive. They wanted a more buccaneering permanent secretary heading the Treasury. Macpherson’s departure was one of three intentions that Osborne’s tight group shared amongst themselves; an Emergency Budget and a probable VAT increase are the others. Osborne wanted his top official to be Jeremy Heywood, who had served as principal private secretary to Conservative chancellor Norman Lamont from 1990–3. When Osborne invited him to dinner before the election, they chimed immediately. The doyen of the Civil Service, Heywood had served both Blair and Brown as the senior official at Downing Street. He knew the territory inside out.
Yet the more the Conservatives saw of Macpherson in their pre-election talks, the more they rated him. They were impressed by his grip and understanding. ‘Getting this transition right is the most important job I have to do in the rest of my career,’ Macpherson told them. He had been principal private secretary to the chancellor at the time of the 1997 general election and oversaw the difficult transition from Ken Clarke to Gordon Brown. No other figure serving in Whitehall had his direct understanding of Treasury transitions.
Soon after he becomes chancellor, Osborne begins to see Macpherson as an asset and an ally. Moreover, Cameron grows too dependent on Heywood’s advice at Number 10: he doesn’t want to lose him. Osborne is also disconcerted by some Treasury voices who counsel him against Heywood: they criticise him for effectively running a shadow Treasury operation in Number 10 under Brown. Alistair Darling’s strong advice to Osborne – the two men like each other – is to keep Macpherson.
Not since they prepared for power under Thatcher in 1979 has an incoming Conservative government had so much trepidation of the Civil Service. Osborne and Michael Gove, a close ally of Cameron’s and recently appointed Education Secretary, are the most wary: the former thaws, but very significantly, not the latter. Macpherson and Treasury officials throw themselves into the process of identifying spending cuts, and Osborne realises that Brown and Ed Balls were the authors of Treasury profligacy over the previous few years. Osborne’s team soon dub Macpherson ‘Mr Fiscal Conservative’. They retain doubts about Gus O’Donnell, Macpherson’s predecessor at the Treasury, who they know does not sympathise with their core economic judgement. Indeed, O’Donnell worries that Macpherson and the Treasury are so keen to show the new kids on the block their readiness to make cuts that they risk going much too far.
Osborne’s planning takes a further dent. He has anticipated Philip Hammond, the shadow Chief Secretary, becoming a kind of ‘super Chief Secretary’ after the election, taking over much of the work on spending and efficiency, and even day-to-day running, leaving him free to work with Cameron from Number 10 and to range widely across government policy.1 The team had been struck by how under New Labour, the post of Chief Secretary had become effectively Number 10’s spy in the Treasury, so great was the mistrust between Downing Street and the Treasury. The fact of coalition, and the need to find posts for senior Lib Dems, rules Hammond out, to his deep chagrin (he is given Transport instead). In his place, David Laws, hitherto Lib Dem education spokesman, is appointed. Laws is philosophically in tune with Osborne’s agenda, but he will not be freeing up Osborne to rove as Hammond would have done.
Laws is immediately struck by the closeness of the relationship between chancellor and prime minister, with constant messages to and fro about the cuts: ‘We kept getting detailed and clearly quite personal feedback on some parts of work. The PM stress-tested the whole thing in quite a lot of detail. I had imagined he would have outsourced it completely to George,’ he says.2 The political impact of changing the reimbursement rate of mortgage subsidies is typical of the issues that Cameron raises. ‘I’d been used to the Blair/Brown era, where Brown would say to Number 10, “I’m in charge, here’s a copy of what I’m going to say. Don’t give me any feedback.” Here was a relationship where David clearly had a lot of trust in George, but expected to be involved and where we had to demonstrate that the judgements that we were making were sensible.’3 Treasury officials are equally amazed at the intimacy and trust, as is Heywood himself, who has never seen a PM/chancellor relationship so close. From the very first days in power, it is apparent to all that this is going to be a very different era from the acrid relationships between Blair and Brown, and then Brown and Darling. Different too from the Conservative experience before 1997: witness Thatcher’s fraught relationship with Nigel Lawson, and John Major’s with Norman Lamont, both ending in departures of the chancellors.
The success of the government over the next five years will depend utterly on the two principals’ closeness. Cameron is akin to the older brother and Osborne the younger. Osborne is the metropolitan liberal thinker, a product of the edgy hothouse St Paul’s Sch
ool; Cameron is more laid-back, more upper middle class and more cautious, a pragmatic Tory squarely in the tradition of Macmillan and Baldwin. Both are skilful tacticians, but Osborne is more attuned to presentational nuance, immediately sensing the advantages to the Conservatives of being in coalition with the Lib Dems and ensuring the economic strategy is the government’s leitmotif. ‘We’re not going to waste time having divisions between chancellor and prime minister,’ Hilton says on the eve of the general election. ‘George will be embedded at the heart of Number 10. They will be inseparable.’4 And so it proves. Both Cameron and Osborne know that where PMs and chancellors have got it wrong in the past, two factors have been responsible: disagreement over policy, as between Thatcher and Lawson, and rivalry for the top job, as with Blair and Brown. Both are utterly committed to avoiding the same mistakes. Both know who is the senior.
Osborne had spoken to Treasury officials before the election about a proposal to launch the Office of Budget Responsibility (OBR), an independent body to oversee the public finances. The idea was influenced by advice from economists Sir Alan Budd and Professor Kenneth Rogoff, which Hancock worked up in an announcement at the 2008 party conference – when it was drowned out by noise from the financial crisis.5 At the press conference on 17 May 2010 launching the OBR, Laws happens to mention that outgoing Chief Secretary Liam Byrne has left him a cavalier note, with a stark message: ‘I’m afraid there is no money.’ Byrne’s throwaway line immediately becomes a national story. Andy Coulson sends an urgent request for a copy of the original being demanded by the national newspapers. Laws confesses to Osborne that he had only mentioned it for light relief and what should he do? ‘If you don’t want to give the letter to Downing Street, don’t give it to them,’ Osborne tells him, so he doesn’t. Byrne’s message duly appears in the press, but not the letter itself, though it would eventually see the light of day, principally as an effective prop for Cameron during the 2015 general election campaign. In a similar spirit of collegiality to his new partners, Osborne offers Nick Clegg to put a stay on cutting an £80 million loan for Sheffield Forgemasters in his constituency, promised by Labour in March, to enable the company to continue manufacturing. Determined to show that he is sharing the pain, Clegg waives his offer. Clegg’s decision causes considerable upheaval in his constituency.
On 24 May, Osborne and Laws announce Plan A’s hors d’oeuvre, the initial £6.2 billion of immediate, in-year cuts.6 These had been foreshadowed in the Conservative manifesto, and the Treasury has been working on them during the campaign, so they are processed smoothly through the machine. The precise figure emerged after Darling’s last Budget in March 2010: it was needed to pay for reversing the jobs tax and to be seen to be ‘robust but not reckless’. One of the officials working on the cuts is Chris Martin, who later succeeds Heywood at Number 10, his deft work having impressed Osborne. Peter Mandelson, éminence grise to both Brown and Blair, cautioned against the risky strategy of announcing immediate cuts: but Cameron and Osborne are very sure they want to be upfront and explicit about precise figures in the general election.
Cameron and Osborne approve of the input of Laws over their first taster of cuts. Osborne misses Hammond, though finds Laws as ‘dry as a bone’ and ‘more fiscally conservative’ than any of them. Laws deals firmly with the unprotected departments including the Department for Communities and Local Government (DCLG), Culture, Media and Sport (DCMS), Work and Pensions (DWP), and above all with the Home Office. After long torrid discussions, Home Secretary Theresa May settles in the nick of time – at 11 p.m. on Friday 21 May.7 Laws dispels altogether any apprehensions that the Lib Dems cannot take the heat of delivering Plan A on the ground. ‘Lib Dem support for fiscal consolidation was important, because it broadened the legitimacy for the strong action that was taken and it underpinned the whole government,’ says a senior Treasury official.
Things are going well for Osborne. Treasury officials are seriously warming to their new chancellor. After thirteen years of being dictated to, some say bullied, by Brown and Balls, they now have a chancellor who is powerful, but also an agreeable colleague: ‘We were very excited by the new atmosphere. Osborne wanted to know what we thought and was genuinely interested. He was comfortable with us disagreeing with his arguments and being challenged on his thinking. It was pretty refreshing after what had come before,’ says one senior mandarin.
On 29 May, with discussions in full swing, David Laws resigns following revelations in the Daily Telegraph that he claimed £40,000 of parliamentary expenses to pay rent to his partner.8 This is a major blow to Osborne: he has lost Hammond and now Laws within the space of a month. Laws is promptly replaced as Chief Secretary by Danny Alexander, chief of staff to Clegg in the run-up to the general election. He had been appointed Secretary of State for Scotland after the election but serves for just seventeen days. Rather than a fatal blow to the coalition’s economic policy and to the cohesion of the two parties, it proves heaven-sent serendipity. Alexander soon proves as dry as Laws, some think even drier, and combines toughness with humanity. He rapidly forms a close relationship with Osborne and Oliver Letwin; a relationship which proves of enduring value – existential value, perhaps – to the coalition over the years.
Within hours of his joining, the Treasury inform Alexander that there is more scope for cuts, so eager are they to show the financial markets that the government is prudent and serious, while Alexander initially argues for fewer. They settle closer to the Treasury end of the argument. O’Donnell is rare amongst officials in cautioning against too big cuts because of his scepticism about government’s capability to deliver them. A series of meetings of the big four – Cameron, Clegg, Osborne and Alexander, later to be institutionalised in an arrangement unforeseen by the Coalition Agreement as ‘the Quad’ – finalises the decisions in the run-up to the Budget.
Osborne and his team are eager to get on with reforming the banking system. In their pre-election discussions with Macpherson, however, they decide to hold back from immediate implementation, and to produce a White Paper on financial reforms that leaves the door open. After discussion with Mervyn King and others, Osborne convinces Lib Dem Business Secretary Vince Cable that the Bank of England must have oversight of the banking system and that there is increasing recognition across the world that banks of last resort have to be in the same body as central banks. ‘The return of all those powers to the Bank was quite striking,’ says the former deputy governor Paul Tucker. ‘It was to become more powerful than it had been for eighty years. Constraints and good design were therefore imperative.’9 On 16 June, Osborne announces that he will set up the Independent Commission on Banking under the chairmanship of Sir John Vickers. The Treasury, nervous that the new government might be overly quick to regulate the City, thereby damaging its competitiveness, are happy with the delay.
The Conservatives had promised the Emergency Budget within fifty days. It comes on 22 June, after just forty-one days. The key announcement is the commitment to a clear deficit reduction plan over the life of the parliament, and the confirmation of what the figure will be. Officials in the Treasury and Cabinet Office continue to be struck by the readiness of the prime minister to be so supportive of the chancellor and Treasury. Back in mid-May, the Treasury had presented their proposals for the pace at which the deficit should be reduced, offering Osborne a set menu of cuts. The Budget presented on 22 June is almost identical to recommendations laid out in the Treasury’s initial papers.
The Quad proves its worth in the run-up to the Budget. Under normal conditions, the chancellor and the Chief Secretary, with the PM, are the figures who sign off on the details of the Budget: not even the Cabinet are told until the day the speech is delivered. But Britain now has a coalition, and the Chief Secretary is from another party, as is the deputy prime minister. The Quad therefore remains after the Budget, and reaches maturity during the Autumn Statement. It does indeed become the key buckle binding the coalition together.
Clegg worri
es that the cuts might compromise the delivery of public services: Alexander reassures him that quality will not be compromised.10 Osborne takes his Treasury team away to Dorneywood, the eighteenth-century Georgian house used by the chancellor, to analyse the proposals. They realise that they are about to be the authors of the toughest deficit-reduction plan ever enacted in peacetime Britain. It is unknowable how it will work out in practice, whether the country will accept it, and whether they are cutting too quickly or whether they should be going even further.
Savings are to be found mainly through cuts, but the Emergency Budget also brings in tax increases (80% of the deficit reduction is to come from cuts, 20% from tax increases). Prime amongst them is the plan to raise VAT from 17.5% to 20%. This is potentially very difficult. The Lib Dems are worried, as the change is regressive. ‘It’s difficult and damaging,’ Clegg tells Osborne, ‘but I can see that it has to be done.’11 Further debates take place on whether the VAT increase should come into force immediately: the decision is taken to delay it to January 2011, principally for administrative reasons. The Treasury is surprised by how political Osborne is. ‘It is clear that they don’t have much time for tax credits,’ says an official. Osborne and his team indeed regard Gordon Brown’s innovation as overly complex and riddled with perverse incentives. They decree that they will be much less generous. Housing benefit equally will be hit, the Treasury believes for political reasons again. The Conservatives are clear, however, that they will not touch pensioners.
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