BLAIR’S BRITAIN, 1997–2007
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they can also be extended, at a pinch, to offer some justification for tax
leniency towards the (involuntary) saving through defined-benefit, fully
funded private pensions, with which Britain, as it happened, was far
better endowed in 1997 than all but two of her EU partners.
In 2007, the Treasury was forced to reveal some internal correspondence that had warned Brown not to scrap pension dividend tax credits,
for fear of lowering UK share prices, raising the cost of capital to companies, and imperilling the sustainability of such pension schemes. After
share prices did start tumbling (worldwide) in 2001, many definedbenefit company pension schemes did indeed close to new employees.
Britain’s much envied private pension funds sickened; and some died.
The £5 billion-a-year credit removal was certainly a contributory factor
here. But really only a rather minor one. Much more serious, in this
author’s view at least, was the remorseless increase in life expectation
(much of which government actuaries, and many private sector actuaries, had for mysterious reasons been too cautious to predict), the fall in
long-run interest rates to which it was linked, the stock market swings,
and the new accounting rules concerning return and shortfall projection
(which pushed the funds into lower-yielding, ‘safer’ assets).
Of more enduring significance was the government’s commissioning
of a review of state pensions by Adair Turner.29 This report had numerous
proposals, among them to raise pension age in stages, and re-establish an
26 A. Atkinson and J. Stiglitz, Lectures in Public Economics (New York: McGraw Hill, 1980).
27 R. E. Lucas, ‘Supply Side Economics: An Analytical Review’, Oxford Economic Papers, 42,
1990: 293–316.
28 N. Kaldor, An Expenditure Tax (London: Allen and Unwin, 1956).
29 A. Turner, A New Pension Settlement for the Twenty-first Century (London: HMSO, 2005).
earnings link. Blair and Brown are known to have differed on the timing
of the restoration of the link to earnings (which have tended on average to
rise some 1.5% to 2.5% per year faster than prices). Blair is thought to
have favoured a rapid change; Brown saw the advantages for the public
finances in delaying it as long as possible. The eventual compromise
seems to have split the difference.
Nonetheless, it is sad that Brown did not revisit his 1997 decision on tax
credits when the pension funds ran into serious trouble four years later.
Perhaps he thought of doing so; but at this stage the public finances were
deteriorating, and an annual revenue loss of £5 billion would have been
even more unwelcome than before. It is also much to the Blair government’s discredit (but certainly not Brown’s) that its minister, Alan Johnson,
capitulated to trade union pressure in postponing, for decades, wellconceived proposals to start raising the retirement age for public servants.
Given rising life expectation, this surrender in 2005 leaves a large hidden
cost for future taxpayers. It also flies in the face of concepts of equity. And
the fact that public servants retire typically at sixty, if not earlier, aggravates
the problem further. Johnson’s giveaway has far greater long-run consequences than a two-year advance in the earnings link for state pensions.
Johnson took the soft, myopic option to yield to union pressure on
public servants’ future retirement dates. This avoided the risk of an embarrassing strike. The grave extra burden on posterity (not just extra taxes – in
all likelihood, lower capital too) would of course trouble the Treasury. But
it would escape much wider notice. Furthermore, Johnson was following
precedent. A year earlier, John Reid had capitulated to the BMA (British
Medical Association) on hospital doctors’ pay and working conditions.
After Thatcher’s reforms, British trade unions are best thought of as bargaining partners for government in the determination of government
employees’ salaries. The BMA represents such bargaining at its canniest.
From late 1999, Blair and Brown prepared for a major increase in state
spending on the National Health Service. The aim was partly to reduce
waiting lists, partly to plan for an ageing society with increasing medical
needs, and partly to make up for what was widely perceived as many years
of under-expenditure, at least by comparison with France, Germany and
Scandinavian countries, and with the US, which (in 2006) spent more
than twice as much on its residents’ health as a share of income as Britain
did. Indeed one recent paper30 argues that America’s health spending-to30 R. Hall and C. Jones, ‘The Value of Life and the Rise in Health Spending’, Quarterly
Journal of Economics, 122, 2007: 39–72.
income ratio is likely to double by 2050, reflecting rising life expectation
and the increased relative demand for health products as income per head
goes up. In the US – unlike the UK and other countries in Western Europe
– much of the health spending is private. One of the biggest tragedies of
Blair’s government is that so much extra public spending on health
turned out to have so little real effect.
One reason for this was the £12 billion (and rising) bill devoted to a big
computer project for the NHS. Blair had conceived this idea himself after
a brief encounter with Bill Gates. It was hurriedly agreed upon. Scrutiny
was minimal. If Blair’s successors do not kill it, the project might actually
come to fruition one day, and, if implemented, might even succeed in
increasing efficiency and cutting future costs. But the present outlook is
not encouraging. The project looks likely to join the Greenwich dome and
the Holyrood Parliament31 as a spectacular symbol of one of the worst
aspects of Blair’s government – its gullibility, mismanagement and waste.
(Ironically, however, it was probably the Holyrood scandal that may have
convinced Brown and Blair that private sector construction management
had to be more efficient than public sector.) Another was the consequence
of the terms of the private financing initiative (PFI) applied to the funding
of new hospitals, schools and London Underground maintenance. A third
was the failure to develop effective mechanisms that could prevent the
rapid proliferation in the number of highly paid hospital management
posts. And the fourth – a particularly costly error, since it led to a sharp fall
of perhaps 22% in the medical services acquired for each pound spent on
hospital doctors – was Reid’s outwitting by the BMA. Brown was
Chancellor throughout Blair’s decade at No. 10. But Reid was more
typical, rarely staying at any of his posts for more than eighteen months.
When up against the BMA, he was newly installed as Health Secretary.
Like his master Blair, Reid was sceptical of civil servants’ advice, impatient
to ‘settle’ a complex problem, keen to be seen to ‘deliver’ reform and not
especially skilled or interested in financial detail. The BMA read Reid like
a book. Brown’s reaction to their tricking him will have been devastating.
Blair himself
may well have failed to grasp its sorry consequences.
The private finance initiative
The PFI, on the other hand, commanded support from both Blair and
Brown. For Brown, it had the merit of employing private sector skills in
31 Completed after long delays and almost four times its initial budget.
ensuring that construction projects were completed on time and within
budget, something that British public officials have often found challenging as far as historical records go back. Conveniently, it placed capital
spending off balance sheet. On top of this, it seemed to offer a relatively
dependable way of making good a generation of underinvestment in so
much of Britain’s public infrastructure. And to clinch matters, PFI might
morph New Labour’s ‘third way’ from fog and spin to concrete.
But there were snags. UK firms borrow at higher rates than UK governments, and this must be reflected in the rental charges the firm receives on
a PFI project. The differential is non-trivial, and rarely less than 150 basis
points per year. For a long-term project – and most PFI schemes, some 80
agreed in hospitals and 100 in education in the Blair years, have involved
twenty-five-or thirty-year leases – this unfortunate wedge could compound into a really large gap. (A PFI partner company that charged
break-even rent might have to cut construction costs by around 30% or
more under the public ownership alternative for the taxpayer to secure
any gain.) And for the hospitals and schools that were cajoled into doing
a PFI project, the impact this would have on their cost streams might be
very serious. Great strains were already manifest by the end of Blair’s
prime ministership. One particularly absurd consequence was that some
older hospitals, not encumbered with PFI obligations and in a stronger
financial position, have been threatened with closure to stem the losses in
the PFI hospitals. Even if PFI hospital rent fees are so high that the
authorities would otherwise be tempted to walk away from them, the PFI
contracts have committed them to the rent payments. So the health and
school authorities are prisoners of bad contract drafting and extraordinary naïvete on the part of Blair’s ministers, civil servants and/or advisers. The public sector’s inability to manage public sector investment
projects was, it turned out, complemented by its inability to match the
wickedly clever bargaining skills32 of the private ‘partners’’ lawyers.
Worse still, ensuring that PFI projects were superior to traditional
public ownership projects would turn critically on astute government
contracting. The PFI company might well bully subcontracting builders
into working to budget, because of its self-interest. But it would also have
an interest in maximising its monopoly power later on. It could insert
legal clauses in the contract to ensure reversion if use were changed, and
32 D. Abreu and D. Pearce, ‘Bargaining, Reputation and Equilibrium Selection in Repeated
Games with Contracts’, Econometrica, 75, 2007: 653–710, have a brilliant new primer on
how repeated bargaining ought to work when parties are rational. Perhaps Whitehall’s
architects of PFI schemes might benefit from consulting it.
the status of sole supplier of maintenance services, or sole beneficiary on
resale, for example. Many schools and hospitals have fallen victim to
sharp practices of this kind, and subsequently rued the day they entered
the PFI project. And at least one prominent PFI partner company has fled
offshore to deny the Exchequer a share in its booty.
Hints of gullibility and waste were intertwined with a Thatcherite suspicion about civil servants’ advice in another feature of Blair’s government. This was its growing reliance on private companies for expensive
consulting services. Poor Sir Humphrey had begun to perspire under
Thatcher. But it was Blair who really gave him his comeuppance. The civil
service was famous for its lucid, crisp judicious summaries of pros and
cons, completed with an elegant and usually unanswerable argument for
a particular course of action (which might well be to do nothing). Like
Thatcher, Blair was apt to regard these messages, and the formal meetings
for which they were prepared, as unhelpful, time-wasting, pompous
obstructions. Instead, his own aides would analyse issues, feed ideas up,
square them with the all-important communications supremos, and, if
the need arose, call in companies to do any research legwork or complex
thinking. For the companies, the task would be to produce some answers,
decorated with flashy Powerpoint slides, engineered – cynics might think
– as much with an eye to repeat business from the key individuals whose
preconceptions they might be fortifying, as to providing dispassionate
top-quality advice in the public interest. Best of all, Blair hoped, the
glossy little materials from private consultants seemed to offer an escape
from some of the volumes of civil service documents that filled his and
other ministers’ nightly red boxes.
Private computer software companies also fed royally from Blair’s
table. Instead of waiting to buy a proven off-the-peg system that involved
minimal tweaking, ministers and officials, prompted eagerly by the companies themselves, would often insist on something bespoke and untried.
The companies would aim first for acceptance in principle on a fairly
modest figure and optimistic timescale, and rely on modifications to
specifications, and small print inserted into contracts by cunning
lawyers, to keep ramping up their fees later on. At its worst, the result,
from which no one could avoid blame, least of all the relevant ministers,
might involve many billions of wasted pounds. Blair’s NHS computer
programme scandal was one example of many. Other notable IT infelicities included serious problems with passports and with social security
computerisation glitches, and the inability of DEFRA, after adopting an
expensive new computer system, to pay many of the UK’s farmers their
dues after the EU’s 2004–5 reforms to the Common Agricultural Policy.
Blair could reply with some justice that many foreign governments have
proved just as reprehensible, if not more so,33 and that the private sector
also suffers from contracting errors, especially in relation to computer
software, which we hear less about. The National Audit Office (NAO)
explores and publishes details of administrative errors in Britain, but
only by government. Yes; but the NAO’s reports are ‘coordinated’ with the
offending department, and might well have been even more embarrassing had it enjoyed true independence.
Distribution at home and abroad, and over time
While the Blair years saw some extra income dribble through to a few
lucky PFI and computer software bosses, most definitions reveal that economic inequality and poverty actually fell during the decade. This is
interesting, because the opposite trend has been displayed in the US, with
which Britain’
s economic experiences are so often compared. And
inequality tended to rise under Thatcher, especially when measured after
tax. Two important measures by the government will have played some
part in Britain’s record under Blair. These are the Working Tax Credit
(WTC), designed to raise the incomes of working families, with and
without children, and the Minimum Wage (MW). WTC represents a
major refinement of, and a substantial increase in generosity in comparison with, a sequence of previous schemes, which may be traced right back
to Family Income Supplement (introduced under Heath in 1972). Its aim
is to raise the consumption of the working poor, especially those with
children, rather than provide unconditional benefits, or unemployment
assistance, which would tend to reduce employment. WTC is therefore
‘supply-side friendly’, and it owes some of its design features to Clinton’s
welfare-to-work policies introduced in the United States. The second was
introduced de novo, as far as Britain was concerned, in 1999. At the time
of writing, it was last raised in October 2006 to £5.35 per hour for adults.
Both measures raise controversy. With WTC, some complain that
nothing is done for the working-age unemployed, who constitute a large
share of the very poorest, except to raise the reward for labour force participation. Others note that there is a difficult trade-off: the more generous
WTC is at low wages, the greater the financial cost, and so the greater the
33 The European Court of Auditors, for example, has refused to sign off the European
Commission’s accounts for over ten years, because of suspicion of fraud and poor administration (usually on the part of national governments).
need to pay for it by clawing it back as earnings rise. A steep rate of clawback is tantamount to a high effective marginal tax rate, which will discourage effort and training and longer hours of work for workers with pay a
little further up the scale. A lower rate of claw-back involves reducing the
disincentive effect in this region, agreed, but at the cost of spreading it
further up the scale – and raising the total cost of the scheme into the
bargain, which can only imply considerably higher marginal tax rates elsewhere. Brown opted for a relatively generous scheme with a relatively steep