SEVENTEEN
Omnishambles Budget
March 2012
‘George felt incredibly cross with himself over his 2012 Budget. He had let down people who trusted him to deliver. His reputation as the person who delivers the political goods for the government had, very rightly, taken a big knock,’ reflects one insider who worked closely with Osborne. ‘It was the moment that he felt under greatest political pressure over the five years in power.’ What had gone wrong? Had the man who had steered the Conservative Party through Opposition and power so effectively over the previous seven years suddenly lost his grip? Why had the Osborne story suddenly become one of sizzling hubris?
Osborne revels in the sangfroid of breezing off to Washington on Tuesday 13 March, telling those left behind, ‘Don’t worry, Rupert is in charge.’ A passionate devotee of American politics and history, he has been looking forward to the trip for weeks. He is too smart not to appreciate there is a risk, but he reckons ‘the choice between going to America to hang out with Obama or lingering in London to monitor Twitter and the blogs in case of Budget leaks was no choice at all’, as Matthew d’Ancona memorably put it.1 He has even succeeded in showing worried US administration figures and congressmen that the American and British approaches to the financial crisis are not irreconcilable, missing the trip on Air Force One to do so: Cameron’s team mollify him with packets of presidential M&Ms they had lifted from Obama’s plane. Following the Budget a week later, his reputation is in tatters, and the government is facing the biggest crisis in confidence of its first two years in power. What has gone wrong? And why did things unravel so quickly?
From the moment that Alistair Darling raised the top rate of income tax from 40p to 50p in his March 2009 Budget (coming into effect in April 2010), Osborne was determined that, if elected, he would bring the rate down: ‘I had put a lot of stock into cutting the 50p rate as early in the parliament as I could.’ As he mulls over his options with Rupert Harrison after the Autumn Statement in late 2011 and early 2012, it is clear in his mind that he has only three more Budgets after March 2012, and this may well be the moment to do what they are sure is needed to help the economy grow. They agree ‘we shouldn’t worry about short-term unpopularity’. As Harrison recalls, ‘George felt it was the time to be bold. We were only two years into a five-year parliament. We had no illusions that we were planning a popular Budget.’2
Osborne’s first Budget in 2011 has failed to kick-start the economy, and by the end of the year the economic outlook remains bleak. On 25 January 2012, the GDP figures for the final quarter of 2011 are published, showing the economy had shrunk by 0.2%, the first fall in quarterly GDP since the last three months of 2010. Britain is thought to be slipping into a ‘double-dip recession’ and Osborne comes under huge pressure from the business community, and from his own party, to boost the economy. The figures have got to him. His confidence has dipped seriously, and he starts musing, as Janan Ganesh records, ‘about his own political mortality’. ‘I don’t know how many more Budgets I will give,’ he tells his team. He confides in friends that he doesn’t know if he will ‘still be doing this job next year’.3
The Times and the Telegraph newspapers, so friendly to his austerity programme back in 2010, begin to ask whether he should be doing more to stimulate the economy, while the banks, still smarting at moves to regulate them, are biting back – especially after the subsequent government decision to strip former RBS chief executive Fred Goodwin of his knighthood, which went down very badly. The Institute of Directors warns of the government creating ‘anti-business hysteria’.4 Chancellors bow to pressure, and Osborne is no exception. He had ducked the idea of reducing the 50p rate in his 2011 Budget, after objections from Cameron about how it would look. Osborne instead announces in this Budget that Her Majesty’s Revenue and Customs will produce a report into how much the 50p rate is in fact raising. Osborne has long suspected that the extra revenue is insignificant compared to the disincentive caused by the high rate. As well as HMRC, the Institute for Fiscal Studies also produce a report which provides just the evidence that Osborne hopes for: ‘the rise to 50p had raised a mere £1 billion, while reducing the rate to 45p might cost as little at £100 million’.5 Even the Treasury favour change: ‘We thought that sticking to Plan A was losing us money,’ admits an official.
By January 2012, Osborne’s mind is settled on reducing the top rate. But how far? He speaks to Cameron about reducing it to 40p. ‘In favour of 40p was that we would take a big political hit if we did 45p, so we might as well go all the way to 40p, because we would be as well hung for a lamb as for a sheep,’ as one senior aide puts it. Cameron thinks 40p is going too far, conscious as ever about the move being portrayed as favouring the wealthy. But he removes his objection to 45p, and the decision is confirmed by early February.
Intense meetings of the Quad take place during January and February. Altering the VAT rate has been discussed, but ultimately ruled out. Nick Clegg and Danny Alexander are publicly receptive to the cut in income tax, as long as there are compensating benefits for their own favoured causes, namely increases in the personal allowance. ‘Our number one policy objective from our manifesto, on which we were keen to make progress, was to cut income tax,’ says Julian Astle, a senior Clegg aide.6 Osborne is more than usually nervous of leaks, and believes that the Lib Dems had leaked discussions before the Autumn Statement in November 2011. ‘I want nobody in the room apart from principals,’ he says. Special advisers are thrown out, more or less nicely, which the Lib Dems claim prevents them sniffing out the political folly of some of the proposals produced by Treasury officials. In the privacy of the Quad, Clegg is still worrying about reducing 50p: ‘I’ve got no ideological objection to doing it, but doing so at a time of massive angst and social insecurity, and before our austerity plan is clearly working, is the wrong time.’7
Lib Dems are nevertheless open to the idea of a cut to 40p, on the key proviso that there is a mansion or property tax on the wealthy. The Treasury like the sound of this proposition, and have been pushing very hard for a property tax themselves. The Lib Dem proposal will mean a net tax rise on the rich, and Osborne is quite receptive to the idea: Tim Montgomerie is one of several commentators on the centre right who are arguing for the burden of tax to shift from earned income to property and assets.8 Cameron’s shire Tory sensibilities are offended. He doesn’t like what he is hearing: this is rare territory where his Toryism and Osborne’s are in utterly different places. Andrew Feldman doesn’t like the sound of it either, and nor does Kate Fall. They put their foot down: a mansion or property tax is off the table.
The Liberals respond by going very cold on 40p. Osborne worries he is losing Lib Dem support even for a reduction to 45p, and thinks the coalition government may lose its chance to send out his ‘big signal’ that ‘Britain is open for business’. Clegg and Alexander come under pressure and concede to 45p, but demand heavy compensation.9 ‘He got sucked into a deal with the Lib Dems. He had to offer something juicy enough for them to accept it as a trade-off,’ says a figure close to Osborne. ‘They were demanding a big increase in personal allowance of just under £800.’ The Lib Dems say they have to ‘fight tooth and bloody nail’ for an increase in the amount individuals can earn before paying tax. Osborne maintains that he is very comfortable with the idea, and had spent much of his time as shadow chancellor saying ‘we might well increase the personal allowance in government’. He is later heard to say, ‘Frankly, it is much the easiest thing the Lib Dems ever demanded.’
All this had to be paid for, which, as one insider admits, is ‘where the legs fell off the stool’. Osborne holds discussions with Treasury officials and with the Quad, thinking through how the extra money could be found. ‘People say that we hadn’t done the detailed work on these proposals. That’s not true. We had spent hours and hours on it,’ says a Treasury source. ‘But George didn’t see the wood for the trees. He didn’t stand back and say, “Hold on, we are increasing taxes
on working people, to reduce taxes on the well off.”’ A key Quad meeting takes place in the Cabinet Room on Monday 12 March. ‘Suddenly, a load of discussions are concertinaed into one big Quad meeting because Osborne has to fly off to DC the following morning,’ says one disconcerted colleague. Osborne thinks it is all sorted, but Number 10 are left frustrated: they are feeling frozen out of the final stages of the Budget. It is the first Budget in several years where Number 10 officials have not been intimately involved.
The Treasury keep these final stages of the 2012 Budget unusually tight, in the words of one insider, ‘partly, and ironically, because there was a concern about leaks and partly because George didn’t want to engage with what he knew would be strong resistance to what he wanted’. As Number 10 don’t know all the details of the Budget, it is ill-prepared to defend it. When the 50p cut is leaked by the Lib Dems on the Thursday before Budget day, they are stymied. As Oliver is trying to think through how to respond from his rickshaw weaving its way across Manhattan, he reasons that it’s always worse to change a plan, even if he isn’t totally sure what the plan is. ‘This is a real problem,’ he tells Number 10. ‘I am 3,000 miles away. What is going on?’ No one in Number 10 knows whether the leak is deliberate or not. They are in a terrible predicament.
One figure who had foreseen problems is Andrew Cooper, who had written a memo within Number 10 saying that to cut 50p at this time would be a ‘political mistake’, and that they are in danger of making a grave error by offering a ‘tax cut for millionaires while taking away tax credits for working families’. He argues that their number one priority must be the cost of living: he wants to see a cut in fuel duty, but Osborne rules that out. Another concern in Number 10 is the Budget’s ‘granny tax’ proposal, a tax increase on pensioners, which hadn’t made it on the Number 10 list of top items in the Budget. The Treasury has sold it to Number 10 as a ‘technical tidying up’. Osborne knows it is a risk, but he thinks that he can carry it because he will be announcing the increase in the personal allowance in his speech, which he has deliberately avoided briefing out to the media. But the night before the Budget, the Lib Dems leak it on top of the 50p leak the week before. Osborne is absolutely livid: as angry as he can be. Worse, he is now alarmed. ‘The Lib Dems deliberately leaked the personal allowance the night before the Budget because they didn’t want Osborne to have it as his big moment. They regarded it as their proposal and they wanted to own it.’
Hilton is disappointed because he argued for a cut in corporation tax to attract inward investment and to boost jobs. He tabled a proposal to cut it by 10% or 11% and came up with a list of welfare savings for Osborne, amounting to £25 billion, to pay for it: the cut to corporation tax was only going to cost the Exchequer, he estimated, £7 billion. Hilton is attracted to the argument that the government is cutting the taxes on jobs by cutting welfare. Like Cooper, he is worried about the timing of the cut on the top tax rate. But Hilton loses out to the Treasury, who argue that cutting corporation tax below a certain point would not be effective. He thinks Harrison has been responsible for warding Osborne off his idea. To Hilton, an advocate of behavioural economics, it is a classic example of the inadequacy of traditional economic thinking.
Hilton and Rohan Silva have been adopting the practice of composing a letter to the Treasury before major economic pronouncements, designed to show that Number 10 is speaking with one voice. They sent such a letter to Osborne before his first Budget in 2010, the two Autumn Statements and the 2012 Budget, outlining for the Treasury three to five Number 10 ‘hopes’ reflecting what Cameron, Heywood, as well as obviously Hilton and Silva, wished. But the system doesn’t work for the 2012 Budget. Hilton’s frustration is that Cameron does not fight the Treasury hard enough. Osborne would say, ‘We want your ideas for the Budget, because all I get is crap from the Treasury, and we need fresh thinking.’ But the 2012 Budget reveals to Hilton that it is truly the Treasury that ‘runs the show’. Cameron has allowed himself to become obsessed, traumatised even, by the acrid Number 10/Treasury relations of the previous thirty years. ‘I don’t want to fall out with the Treasury’ is, Hilton believes, a Cameron tenet that is misplaced. Hilton thinks that Cameron has ceded too much power to Osborne and the Treasury in leaving it to officials and advisers to work on the detail. The 2012 Budget sees the biggest test yet for this ‘Cameron doctrine’.
The 2012 Budget also sees Harrison’s extraordinary power at its most raw. Harrison regards Heywood as a managerial economist, keen to increase government support for lending to small businesses. Although he respected O’Donnell as an economist, he believes Heywood is more fundamentally in tune with what he and Osborne want than O’Donnell, who Heywood has now succeeded as Cabinet Secretary. A low point with O’Donnell came when he produced a paper written by Jonathan Portes shortly before Portes departed in February 2011 as the Cabinet Office’s chief economist, suggesting that the government in effect move to ‘Plan B’, shifting away from austerity to Keynesian policies designed to stimulate the economy. ‘Gus was … wobbly on it … though he was nothing like such a massive advocate of change as Jonathan,’ says one senior Treasury official. ‘It really wasn’t a good thing for Gus to propose at the time. It implied that he was not wholly signed up to the government’s strategy,’ says another.
Harrison is as formidable an economist as he is confident of his right-of-centre convictions. He is also personable, tactful and tenacious. ‘Rupert is very important to George because he provides the arguments that he needs to look impressive with Treasury officials,’ says an insider. ‘George isn’t a trained economist. He needs Rupert constantly by his side.’ Osborne himself is unsparing in his praise: ‘Dr Rupert Harrison is a very able economist. The most able of his generation pretty much. He has delivered on the economics. I have delivered the politics for him,’ he was heard to say. But not even the formidable Dr Harrison preempts what is about to happen.
The pieces are nearly all in place for the fiasco that the 2012 Budget becomes. The final two elements are, firstly, the series of proposals for funding, produced by the Treasury, which might have made sense financially, but not politically: the ‘pasty tax’ (imposing VAT on hot takeaway food like Cornish pasties) and the ‘caravan tax’ (increasing VAT on static caravans) came late in the day, without adequate scrutiny; out of the same filing cabinet came the idea of limiting tax relief on charitable donations – the ‘charity tax’ would inevitably provoke a strong reaction from charities and philanthropists. Knowing this will be sensitive, Osborne flags up to Cameron that ‘there will be a row and people will say it is going to damage the Big Society’. Cameron assents to it – meekly, in the eyes of Hilton. Hilton knows that Osborne has little time for the Big Society, but had not expected him to come up with such an ‘asinine’ proposal.
The leaking is the second factor that turns a potentially hazardous Budget into a disaster. It means that the two key parts of the architecture – the cut in the top rate and the increase in personal allowances – have already been briefed, so the media go to town on the minor and ugly parts. The Lib Dems are brazen about the leaks. ‘It was a very conscious decision on our part to put together a political strategy of briefing to stop the Tories claiming the credit alone,’ says one. Clegg brings in political, economic and media consultants to advise on the Budget. A dozen meet regularly to ensure that the Lib Dems achieve a ‘political dividend’ from the Budget, as Astle put it.10 They are angry with their Tory partners and want to show they are no pushovers. The result is ‘the media has no good news to report on Budget day. They focus instead relentlessly on the bad news and chew over it excessively,’ as Danny Alexander says.11
Osborne and Harrison are guilty, as they admit, of hubris and naivety. Number 10 do not have the time to prepare the ground: it insists it could have made a reasonable case on the new flat-rate pensions and other proposals given more notice. Budget day, 21 March, is a day that Osborne had been anticipating for months, if not years. It turns into one of the u
nhappiest days of his life. Miliband all too easily dismisses it as the ‘millionaire’s Budget’ which destroys forever the government’s claim that ‘we’re all in this together’. ‘How can the priority for our country be an income tax cut for the richest 1% when the squeezed middle are facing rising petrol prices, higher energy bills and cuts in tax credits and child benefit?’ Miliband continues.12
‘The morning after the Budget, I could see we were going to be in for months of misery. I could see even then it starting to unravel. I could see how this was going to go, and it was going to go in only one direction,’ Osborne reflects.13 Cameron shares the same apprehension: as one insider says, ‘It was instantly clear to him that we hadn’t handled it properly. He felt it had become much too transactional, without any central vision about what the Budget was about.’ Cameron’s frustration mounts over the next few days; he is angry with Osborne, but he will not let himself be angry with his chancellor, so he is angry with the Treasury instead. He vows that in future, Number 10 ‘will have a much bigger footprint on the decisions in the run-up to the Budget’. He is cross with Clegg, but he doesn’t let himself be cross with Clegg, so is angry with the Lib Dems instead, blaming their malice aforethought and their premeditated leaking.
Feldman is on the phone within hours of Osborne sitting down after the Budget speech. He tells Cameron he is being inundated with complaints from the business community and is worried about the impact on party donations: a duke has been complaining to him about the charity tax, and his own staff are up in arms about the price of pasties. ‘George took his eye off the ball, and his officials took over,’ recalls one. Cameron’s and Osborne’s relationship remains undamaged, even when Osborne’s net approval rating falls to minus 37 in August, and half the voters in the Guardian/ICM poll think he should ‘lose his job’.14 Cameron does not blink: ‘The prime minister never asked me to step down or even considered anything like that,’ Osborne says.15
Cameron at 10 Page 25
