For the Record

by David Cameron

  Our coalition partners were consulted on every cut, at full cabinet meetings and during regular ‘Quad’ meetings comprising me, George, Nick Clegg and the chief secretary, David Laws. Later, David was replaced by Danny Alexander. Standing over six feet, with ginger hair, Danny was something of a gentle giant. He really wanted to make the coalition work, and was often the voice of reason and conciliation when the arguments became heated. This was a gathering convened for our first Budget, but it lasted the entirety of the Parliament. And there were endless meetings and texts between me and Nick, usually about deals we were having to do.

  It wasn’t easy getting the Lib Dems to the stage where they saw the need for fiscal consolidation along the lines we wanted. George and I had to give way on a lot of their asks. I was relaxed about this. I knew that overall the government and I would be judged on whether we fixed the problem, not on who got what along the way. A lot of the Lib Dem requests we were more than happy to accept, for example the initial increase to the personal tax-free allowance, which the Conservatives gladly adopted, and which eventually took four million people out of paying any income tax during my six years in office.

  The Quad got along well. Nick used to say to me, ‘You’re so lucky. You’ve got George as friend, confidant and partner. I don’t really have anyone like that.’ In time his partnership with Danny Alexander would grow stronger as Danny became more senior, but I could see what he meant. His senior Lib Dem colleagues only seemed his allies up to a point.

  Many of the discussions around the economic rescue took place not as a Quad in the Cabinet Room but in the dining room of the No. 10 flat with me, George, Jeremy Heywood and Treasury spad Rupert Harrison, one of the most talented economists of his generation, passing around endless pages of A3 modelling different proposals, while I served up the pasta. The decisions about which departments’ budgets to protect, though, had evolved between George and me over several years. In opposition we had decided to protect the NHS, our most precious national asset. I was clear: the NHS was sacrosanct. Reform, yes – but cuts, no.

  Protecting the overseas aid budget was much more difficult to get agreement on. In these straitened times there was, unsurprisingly, a great deal of opposition to our commitment to spend 0.7 per cent of national income on development. Even Nick Clegg was prepared to delay it at one stage. I’ll discuss later why we did it and why it was so important.

  There was another area I had said before the election we would protect: pensioners’ benefits, such as free bus passes, TV licences and winter fuel payments. In government I was going to go further, and make sure their pensions saw proper increases. My reason was clear. These people have worked all their lives, and they deserve security in their retirement. They are no longer able, like younger people, to change their circumstances. They can’t get a better job or work more hours. So it is right to make sure that they can rely on the state pension they’ve got coming in each month.

  Of course, there are all sorts of arguments about means-testing these benefits, but that process would cost more than just keeping them universal. Over the years the DWP and Nick Clegg kept trying to cut them, and I had to keep stopping them.

  So I protected pensioners’ benefits and, crucially, brought in what we called the triple lock, which made sure their pension would rise each year by the same amount as the Retail Price Index, average earnings or 2.5 per cent, whichever was highest. Pensioner poverty continued to fall. Means testing was reduced. And then, in a signature reform, we introduced a higher ‘single-tier’ pension.

  Much of our strategy for making savings had been formulated in opposition too, including the controversial step of freezing public-sector pay for two years. George had announced this in his pre-election party conference speech. It was remarkable that we went into an election saying to nurses, police officers, teachers and social workers that they wouldn’t get a pay rise – and still we won more seats than anyone else. Indeed, a majority of doctors voted for us.

  I believe that was because people agreed this was fair. We were only replicating in the public sector what had already happened in the private sector, where many people had seen pay freezes, pay cuts and job losses. We were doing it in a way that protected the lowest-paid, with anyone earning under £21,000 a year exempt. And we were doing it so we could afford to fund those public services in the long term.

  When weighing up where to make cuts, we had to look to where the most money was being spent. Without the DWP – which was responsible for a quarter of all government spending – making its fair share of cuts, other departments would face 33 per cent reductions in their budgets, compared to the eventual 19 per cent.

  The welfare budget is divided into three parts: pensions and pensioners’ benefits; help for the poorest and disabled; and working-age welfare. It was this third element that had seen rapid increases.

  Take housing benefit. That was started by Thatcher in the 1980s and cost £2 billion. By 2010 it cost £20 billion – half as much as the entire schools budget. Some families received £60,000, £70,000, even £100,000 to pay for their housing costs each year.

  Then there was the ‘tax credits’ system that was used to top up people’s wages, and that had been radically expanded by Gordon Brown. One problem was it was being given to well-paid people, including some earning £60,000 a year or more. Another was that, with its bizarre incentives, many low-paid people who received it would be financially better off working less or not at all.

  With such carefree spending, it’s easy to see how we had reached a point where the benefits bill actually came to exceed the receipts from income tax. Every penny people paid into the pot from their pay cheque was being spent not on hospitals or schools or roads or railways, but benefits.

  I know Iain Duncan Smith shared my outrage at this – not only at the money wasted but at the lives wasted in a system that encouraged people not to make the most of their potential. Iain had immersed himself in the pursuit of social justice, passionately seeking ways to cut poverty and transform people’s lives. Now work and pensions secretary, he was able to right these wrongs. He had developed a solution – Universal Credit – with the Centre for Social Justice. It was a simple but profound idea. In the past, if you got a job you tended to lose many of your benefits – not just unemployment benefit, but housing benefit and council tax benefit too – meaning that you could be left worse off. The fear of losing benefits stopped many people from looking for a job in the first place.

  Universal Credit was about combining these benefits together (thus the tag ‘universal’) and paying them to jobseekers and workers on a monthly basis, tapering the payment to make sure work always paid (thus the idea of a ‘credit’). But it was, inevitably, very complicated to implement. It was also hard to get Iain to consent to the idea of saving money as well as implementing his reforms.

  In the end, we won him round. The Emergency Budget cut £11 billion from the welfare budget through a combination of measures: housing benefit capped at £400 a week; child benefit frozen for three years; tax credits decreased for those earning over £40,000, but increased for the lowest-paid. And benefits would now rise in line with the less generous Consumer Price Index rate of inflation, rather than the Retail Price Index.

  Today, Universal Credit is rolling out, slowly. Such a step change is never going to be straightforward, and the issues that have arisen have been with delayed payments. It is vital that process problems do not derail the concept at the heart of UC: that work must always pay.

  If we stuck to this course, the OBR forecast that we would eliminate the ‘structural deficit’ in five years. That was our plan: by 2015 – the next election – Britain would be back in surplus for the first time since the Tories last left government. Even Vince Cable deemed this a Budget we could be proud of.

  By October, the Spending Review came to its conclusion. This was what inspired that big march on Whitehall with the placards and chants
.

  George stood up in the Commons Chamber and went through the details. The Treasury would be asked to make the biggest reductions (33 per cent), followed by Environment (29 per cent) and Communities and Local Government (27 per cent). Half a million public-sector jobs would be lost, which we believed would be made up for by an increase in private-sector jobs. Welfare cuts would be increased by a further £7 billion – something that was much harder to get out of Iain than the first £11 billion.

  Then there was the decision to remove child benefit from high-level taxpayers. Why should people on lower wages fund benefits for those on high wages?

  Pensioners would keep their benefits and pensions would increase, but in the future would have to meet us halfway and accept an increased retirement age of sixty-six by 2020. We saved £34 billion and demonstrated serious government, contrasted with others, such as the French, who at a time when populations were ageing and money was in shorter supply were proposing to lower the pension age.

  Social care would receive a £2 billion boost. Free museum entry would be preserved. We would go ahead with the new train line in London, Crossrail, the biggest engineering programme in Europe. We would continue funding the country’s largest biomedical research facility, the Francis Crick Institute, and protect the science budget. As we were tough on pay and welfare we were able to be (relatively) more generous on education. We saw this as the next ring-fence to build – if we could possibly afford it.

  I’ve said we needed to pick apart everything that had gone wrong over the last decade and more. One of those things was the banking malpractice that had helped to topple our economy. The system of regulation that the Labour government had left us was muddled and incomplete, and had proved a failure. We needed wholesale reform, of a type that addressed the justifiable anger the country felt towards such behaviour.

  First, while there was plenty of financial services regulation, there was no single organisation with the task of assessing the overall risk to the economy of the level of indebtedness. As we had said in opposition, this should be vested in the Bank of England, which would need to be strengthened. This was one of the most enduring reforms we made.

  Second, if a bank failed, or looked likely to fail, the system gave the government no realistic choice but to bail it out with taxpayers’ money. This probably caused more resentment from the public than anything else. Even though politicians knew that banks couldn’t be allowed to fail, because they would drag so much of the ‘real’ economy down with them, there was no way of enabling them to fail safely. So we legislated to ensure that, in future, banks facing failure would be ‘bailed in’ by their bondholders, not ‘bailed out’ by taxpayers.

  Third, there was the longer-term, structural question. Given that the collapse of banks had done so much damage to the financial system and the real economy, wasn’t it time to recognise that there were different types of banking, with totally different risk profiles, and they needed to be handled and regulated in a different way?

  The traditional retail bank took money from depositors and lent it to businesses: a straightforward transaction that was not without risk, but was relatively easy to regulate. ‘Global’ banks, on the other hand, combined this retail model with far riskier activities such as high-frequency trading, complex derivatives trading, taking big bets on market movements and investment banking operations. We set up the Vickers Review which came up with a ring-fencing proposal, separating the two, which we put in place.

  And we needed to address the behaviour of the bankers. They had done some truly dreadful things: taking unsustainable bets, lending to projects they hadn’t properly evaluated, selling people products that were completely unsuitable, and arranging their own remuneration in a way that encouraged dangerous risk-taking. There was a complete lack of proper rules in place, and ineffective laws to prosecute offenders. So we fixed that too: we introduced a criminal sanction for the sort of reckless behaviour that had led to the financial crisis.

  We also brought in far tougher rules over bonuses, pay and transparency.

  I knew my response had to be nuanced: condemning the wrongdoing while continuing to support business, enterprise and go-getting capitalism. In the end, London had some of the toughest rules in the Western world, and still maintained its place as the most successful financial capital in Europe.

  I believed there had to be a limit to the ‘banker bashing’ that Labour – as well as the Liberal Democrats and some in my own party – would have liked to unleash. We needed those banks to support the real economy. For ‘monetary activism’ to work, the banks would have to lend to small businesses, and get the mortgage and housing markets working again.

  There was also the fact that those working in financial services weren’t all champagne-swilling, City-working caricatures. The industry employed one in thirty of the people in the country. Many, contrary to popular belief, were outside London, in places we were trying to boost like Birmingham, Manchester, Cardiff, Edinburgh and Glasgow.

  My solution was to try to reach something of a ‘grand bargain’ with the banks over what needed to be done. It would work like this. We would agree that there would be no further special bank taxes, over and above the levy we had established, and they would agree to increase lending to small and medium-sized businesses, while also boosting some other government initiatives, like the world’s first Social Investment Bank – Big Society Capital – that we wanted to set up.

  There was also agreement about the new rules governing pay, bonuses and the outline of regulatory reform. It became known as ‘Project Merlin’.

  A by-product of this was the Business Growth Fund, an investment scheme we encouraged the banks to set up in order to put equity into small and growing businesses. As I write it has invested £1.9 billion in 275 businesses, and is a model being followed elsewhere in the world.

  One key figure in helping to strike this overall balance between bank reform and bank lending was Mervyn King himself. Quiet and considered, with goggle-thick spectacles, he spoke in measured tones and was very supportive of both the fiscal responsibility part of our agenda and vigorous supply-side reform. But beyond simply keeping interest rates low, he was less helpful when it came to the ‘monetary activism’ that we believed was so necessary.

  In meeting after meeting, George and I would politely point out that we were doing our bit on fiscal policy, getting the deficit down. It was the Bank of England’s turn, we thought, to do its bit on monetary policy to get credit flowing.

  ‘It’s great that you’re keeping interest rates on the floor,’ I’d say to him, ‘but that’s no good to a small businessman or woman who can’t take advantage of them because the banks won’t lend.’

  On this, Mervyn was something of a roadblock. Eventually he produced some good initiatives, like ‘Funding for Lending’ in July 2012, which linked the availability of Bank of England finance to the ambitions of clearing banks to lend to small and medium-sized enterprises.

  But we had to wait too long for too little. Project Merlin had some success, but really it was nine months too late, after the Eurozone crisis had flared up in August 2010.

  Today the government has sold all its Lloyds shares, and our financial services industry is healthier, safer and better-regulated. We started to resell RBS in 2013, but it still remains mostly government-owned. As I argued, maybe the approach the Brown government chose, keeping it as one bank and pushing in taxpayers’ money to keep it afloat, was the wrong model. Perhaps we should have gone for separation, and put the poorly performing assets in a ‘Bad Bank’, fully nationalised, while rapidly floating off healthy banks to help get lending going. We didn’t do that because I judged it was too late to change course. And at least then we showed strategic patience, giving the management of RBS time to nurse this mega bank back to health. As I write it is still a work in progress.

  My role in this was to bring the right parties together
. Sometimes it was tricky and intricate. And of course an alternative, bolder approach was possible. But real political life is complicated, and full of compromise and grey areas.

  What we got wrong on the monetary-activism part of our strategy is that we didn’t go far enough. What we got wrong on the fiscal responsibility part was that it took us a while to work out that the best reforms were those that made a little money from a lot of people, for example freezing pay or aligning welfare upgrades with CPI.

  What didn’t work were reforms that people either didn’t back or couldn’t see the logic of. These were the things that Oliver Letwin would caution against as ‘tiny atomic explosions’ – where the outrage was not worth the saving.

  The proposal to sell the Public Forest Estate, which made up a fifth of Britain’s woodland, was one such example. Caroline Spelman, the secretary of state at DEFRA, put the plan out to consultation after getting the go-ahead from No. 10. Then came the blowback. The fire was stoked by 38 Degrees, the online lobbying organisation that would jump onto any bandwagon and fill MPs’ postbags with endless cut-and-paste objections. It wasn’t a bad policy – but it was politically ridiculous. We were meant to be in the business of planting trees for the future, and here we were selling them off. Once again, I was the man under the car bonnet, falling for a rational and clever plan rather than standing back and looking at the big picture.

  I was learning my lesson. Years after, when a proposal on diverting Britain’s much-loved public footpaths away from gardens, farmyards and businesses appeared in my box, I was very clear in my reply: ‘Avoid. No. No. No. No. No. No. No. No. Which genius thought of this right now? NO. Just leave this as it is. DC.’

  Looking back over those first few months at the helm of Britain’s economy, what do I think? Did we cut too much?

  If you’d asked the BBC at the time, they’d have said yes. I am a fan of the BBC and of its news reporters. But sometimes they seemed like the 38 Degrees of the broadcast world, constantly fighting a battle against austerity. I think they were wrong. Because the cuts – £1 in every £100 spent by government – weren’t that bad. They weren’t as bad as I thought they’d have to be before we took office. They weren’t as bad as the protesters’ placards said or Mervyn King implied they’d have to be. They certainly weren’t as bad as the impression gathered from listening to the BBC.