My Life, Our Times

by Gordon Brown

  In New Zealand and Australia – economies as open to external influences as ours – the exchange rate is taken into account in setting interest rates, whereas the system we designed was more suited to that of a less open economy like America – and we had renounced exchange-rate targeting when we left the ERM. For ten years the exchange rate was stable – but at a level 10 per cent higher than in the twelve years from 1984. In fact, the real effective rate, factoring in unit labour prices, was 27 per cent higher.

  Should the Bank have taken into account not only the direct impact of our exchange rate on manufacturing but also asset prices, particularly when UK house-price inflation was high, in determining interest rates? Well-known economic thinkers Olivier Blanchard and Ken Rogoff believe that interest-rate decisions should reflect concerns about asset prices. However, while the Bank considered the issue of asset prices, they agreed with the more conventional view of the former chairman of the Federal Reserve, Ben Bernanke, that this should be taken into account only to the extent that it affected the inflation rate. These concerns – and the dangers flowing from a risk-laden financial sector – would become more pressing when the Bank and government failed to anticipate what became the worst global financial crisis in most of our lifetimes during 2008 and 2009. And as we approach the third decade of the twenty-first century, it is right to review our macroeconomic regime, as I propose later, and examine better fail-safe early warning systems to counter risk.

  Nevertheless, Bank of England independence had a profound impact on how the Treasury operated: put simply, it allowed ministers and senior officials to focus on the long term. For years there had been televisions on in the corner of every Treasury office, as ministers and officials monitored the markets and their fluctuations because of the Treasury’s role in setting interest rates. With Bank independence, we were freed to take a more strategic view – to ask how we might achieve our aim of full employment, higher living standards, better public services and higher productivity. It allowed us to target previously neglected areas like welfare-to-work, fiscal management, tax reform, modernisation of our public services, the reasons for slow growth and even Third World debt and international economic reform.

  And from my first few months in the Treasury, when the Asian financial meltdown happened, there was no shortage of crises to address. On Christmas Eve 1997, as I prepared to take the chair of the finance ministers’ and bank governors’ G7 – the premier economic forum of the day – the Asian financial crisis hit us. Eddie George asked for an urgent meeting. As usual, he lit up his cigarette before he came to the point. His message was blunt: South Korea was bankrupt.

  Britain was about to assume the presidency of the G7 group of nations. I was the newest finance minister, but as the chairman of the finance ministers’ and bank governors’ meetings, Britain would have to lead the response, and so I spent much of the next few months visiting Thailand, South Korea, Indonesia, Hong Kong and Japan. The roots of the 1997 crisis were not dissimilar to 2008: an unsustainable property boom, a rush for quick and easy yields, a wave of speculative foreign investment, and overleveraged financial institutions. One lesson I learned then was to act quickly and never allow an economy to sink so low that a recovery becomes more and more elusive.

  Another was that the international economy was in urgent need of restructuring. Early on in my time as chancellor, one of our highly respected civil servants told me that the way of the world was that America did the big issues on the international stage and Britain the smaller ones. Another would joke that America led the thinking and we held the pen. I was not prepared to operate to that mindset. I saw that in Asia, but also in the West, the current systems of national regulation did not have the bandwidth to cope with the new complexities of international finance. In a series of speeches I was to give over the next few years, starting with Ottawa in September 1998 and at Harvard in December 1998, I was to challenge what was then called the Washington Consensus – a free-market approach that assumed that all we had to do was deregulate, liberalise, privatise and focus our attention on keeping inflation low.

  Instead I proposed an interventionist approach – international supervision of the biggest financial institutions, a new set of global banking standards, the opening up of tax and regulatory havens to scrutiny, and a major reform of the International Monetary Fund (IMF) to make it more like an independent central bank – not so different from what Keynes had called for in 1944 – with a more explicit duty to monitor and advise on the condition of the global economy. To further these aims, in 1999 I became chairman of the IMF group of finance ministers that met twice a year, usually in Washington, to survey the world economy.

  Travelling on Concorde with Ed Balls and my speechwriter Beth Russell to the IMF meetings in 2002, we heard the noise of an engine blowing out. Instantly the plane fell thousands of feet; passengers at the back of the plane started to scream. I now know you can tell when things are really serious: for minutes, there was no intercom announcement or explanation from the flight deck. Both Ed and I found out a lot about ourselves during these minutes, staying remarkably calm – ‘Do you think there’s any point in finishing the speech?’ I remember asking – but we both felt our time was up. We talked about family and friends – until minutes later we were told Concorde had stabilised and would now fly at low speed to New York using its remaining engines.

  On more than one occasion before I became prime minister I considered invitations to become the managing director of the IMF. But I would have had to give up my constituency and Parliament – something I was not willing to do – and, even then, I still believed Tony would keep to his promises.

  But while we secured the creation in 1999, with German help, of the Financial Stability Forum to monitor global financial market trends and, with an American push, a G20 for finance ministers to take a strategic view of the global economy, we did not secure agreement on the reforms that would have prepared us for the problems we faced in 2008. The IMF did agree to submit to each of our twice-yearly meetings an analysis of the financial risks and uncertainties across the world. But the most important change I proposed – creating an early warning system for the world economy – did not win the support it required. An initiative by the IMF to deal with global economic imbalances also struggled to get off the ground. So, when the most severe global crisis since the 1930s hit, we had to make more progress in cooperation in a few weeks than we had made in the previous ten years.

  CHAPTER 6

  PRUDENCE FOR A PURPOSE

  The Budget is one of the few parliamentary occasions when members of the public take any notice of Westminster. The minute the chancellor emerges from No. 11 Downing Street with the Budget box, people are on the lookout for – sometimes in fear of – the next tax rise, VAT increase or higher fuel, alcohol and cigarette duties.

  At 3.30 p.m. on Wednesday 2 July 1997, when I was just about to stand up to deliver the first of my eleven Budgets, Conservative MPs interrupted with a complaint about Budget leaks. After the altercation had taken up more than a quarter of an hour, I remember turning to Tony, who was sat next to me on the front bench, and saying, ‘We’ve waited eighteen years; I suppose we can wait the extra eighteen minutes.’

  A Budget is usually a year in preparation. It is like painting the Forth Rail Bridge – as soon as one is delivered, work on the next begins. But I had less than two months to prepare for the Budget I delivered in 1997. In the past, chancellors had gone into Budgets after periods of ‘purdah’, when they had been silent for weeks and often months. In my first weeks in office, while our Treasury team of ministers and advisers were spending almost all waking hours planning, writing and preparing our Budget, I was very much in the public eye as we delivered the new settlement for the Bank of England and prepared the ground for the windfall tax to fund our employment programme for young people.

  Bank of England independence had shown us to be fresh and full of new ideas. But it was not this that gave our team the most powe
rful sense of drive and purpose: it was the New Deal to boost employment. My first Budget itself was to be about more than the public finances: it was a Budget for Jobs. The New Deal would aim to help 400,000 young people with no jobs, nearly 100,000 of whom had been on the dole for longer than a year. Until we acted, many faced a lifetime without work.

  When in my first days as chancellor I visited a Job Centre with Andrew Smith, our minister for employment who would go on to manage the delivery of the New Deal with – like every other job he did in government – great distinction, we were left with a clear impression that we were not dealing with young people who were work-shy. They had just fallen through the net and were as keen to work as Andrew and I were. Our policy, I told them, was to match new rights to jobs with the responsibility to take up what was on offer. Even when we told them that the sanctions attached to the New Deal would be tough – that they could not just refuse to take a job – there was no resistance: they wanted jobs. Everywhere I went, I found a positive response to the New Deal.

  In these first few weeks I also visited a children’s hostel in Slough. This showed me another side of the jobs picture – the lengths to which we would have to go to help young people who had missed out on their schooling and whose problems were more than a dearth of skills. The young girl I met had nothing: in her small room, she had no radio, no CD player, only the clothes she was wearing. She had a violent father. She went back to him when she had no money. I have often asked myself what happened to that young girl caught in a cycle of despair with an abusive father, a stormy home life, temporary stays at hostels and nothing of substance to call her own. I left her what cash I had in my pocket but it was only £30. The New Deal had to offer her support, counselling and mentoring – tailored to her needs – but also the chance to earn enough to break free from a violent past.

  In the 1980s and 90s, Britain had been blighted by a long period of mass unemployment. In two deep recessions unemployment exceeded 3 million. And when official unemployment figures which documented the number of registered benefit claimants came down, there remained 2.5 million people outside the workforce who were on Incapacity Benefit. Once those discouraged from registering for work were included, more than 5.5 million adults were workless.

  Our detailed response was the brainchild of the Treasury team I had built up in opposition – in particular our policy advisers Ed Miliband and Spencer Livermore, who worked alongside Ed Balls. The New Deal had first been announced in 1993, and was based on a careful and thorough analysis of international best practice of welfare-to-work policies. It incorporated lessons from the United States, and from successful labour-market policies in Europe, especially Scandinavia. Youth unemployment was such an emergency that we consciously borrowed the phrase ‘New Deal’ from Franklin D. Roosevelt’s series of measures taken in America during the 1930s in response to the Great Depression. To get it up and running within a matter of months was an exercise of unprecedented scale and speed within the Treasury, only later surpassed by the work taken to deal with the global financial crisis in 2008 and 2009.

  Creating the New Deal was one of the most challenging, satisfying and rewarding times of my political life. Securing full employment was a cause I believed in passionately from my own experience growing up in Fife. For most of the last century workers looked for stable jobs that would last a lifetime. A skill once learned would serve someone for fifty years until they retired. By 1997 the world of work had changed. Technological advance was already forcing a regular turnover of jobs and the restructuring of many occupations. Training could never again be confined to just one skill: it was now about building adaptable skill sets. And we were concerned about making work pay. It was not enough to create jobs for the unemployed if they just moved into poverty wages: with the minimum wage, we could start to make work pay, but if we were to cater for the full range of family needs even the minimum wage would need to be topped up. Ed Miliband and Spencer Livermore were, as a result, already discussing with highly motivated Treasury officials tax credits to complement the new minimum wage.

  From May 1997, we met together almost every day to talk about how our plans could be implemented as quickly as possible. We worked to a tight and stretching timetable – legislation in July and the first entrants to the New Deal pilots in January 1998.

  The New Deal for Young People was the starting point. Our plan was simple: to offer all eighteen- to twenty-four-year-olds who had been unemployed for six months or longer a range of options, all of which led to a qualification: a subsidised job with a private employer, full-time training or education, placement with a voluntary-sector provider, or work on a specially created programme to undertake environmental improvements. They could take up any of these offers, but could not choose to remain on benefits. With the New Deal, we were honouring one of our much talked about ‘five pledges’ in the manifesto – to get 250,000 under-twenty-five-year-olds off benefits and into work. I was to joke that the New Deal had been such a popular part of our election appeal that the first entrant to it had been one of our young researchers, the newly elected MP for Shipley, Chris Leslie, who was just twenty-four. And I was able to set out in my first Budget how the windfall tax on the privatised utilities would raise £5.2 billion to fund the New Deal.

  The New Deal for Young People was rolled out nationwide in April 1998. A perverse rule that barred young people receiving benefits if they were studying for more than sixteen hours a week was relaxed. And young people who went into full-time education now received a discretionary grant to help with travel and other costs.

  The next step was to extend the New Deal from young people to the country’s long-term unemployed and then to lone parents, the partners of the jobless, and to the disabled. Here, too, there was a crisis. Four years after the recession, more than half a million adults had been on Jobseeker’s Allowance for more than a year. When we came to office 2 million children were being brought up by 1 million single parents on benefits. Between 1979 and 1997 the number of people on Incapacity Benefit had trebled to 2.4 million. Emphasising capabilities rather than the incapacity of disabled men and women on benefits, we provided a ‘pathway to work’: offering not only training and a personal adviser but a return-to-work cash credit.

  With the New Deal supporting an economy that grew strongly from 1997 to 2008, employment rose by 3 million, from 26.5 million to 29.6 million. We were praised by a normally critical IMF for our ‘innovative efforts to use active labor market policies to help benefit recipients move into work’. According to the Institute of Fiscal Studies, the New Deal for Young People increased the probability of a young person finding a job by 20 per cent. There were also wider economic benefits: the National Institute of Economic and Social Research estimated that the New Deal benefited the economy by £500 million a year. The country’s leading researcher on employment trends, Paul Gregg, who helped advise us, argued that it had ‘a large and positive effect’ on lone parents’ employment rates, as well as their self-esteem. In its first ten years, according to the National Audit Office, more than 1.8 million people were helped into a job through the New Deal.

  The New Deal was, in truth, made possible by an emergency allocation of funds paid for by a one-off tax. The real story of our Labour government is of how we responded to other legitimate public demands for change but only after a period of restraint to ensure the country’s financial position was secure. We imposed a rigid fiscal discipline in our first years precisely so that we could accumulate the financial strength to deal with the injustices that led people to vote Labour in the first place.

  We knew the lessons of history. Previous Labour governments had spent more than they could afford in the first two years of their tenure to honour promises they had made in opposition, and were forced to retrench in their later period in office. We would not make the same mistake.

  I was confident of being able to deliver a genuine improvement in public services, a reduction in unemployment and a stronger growth rate o
ver the lifetime of the parliament. I knew this could be built only on a platform of sustainable levels of debt. But the state of the public finances, we discovered on entering the Treasury, was a further constraint. While the Conservatives had reduced the deficit from its earlier high, I found that they had underestimated by £20 billion how much the nation would borrow over the next three years. We found the public finances were indeed as bad as we had been saying they were.

  In 1997, I announced two new rules on the public finances which went beyond the constantly changing fiscal promises that had characterised the Tory years: what I called the ‘golden rule’ on borrowing and the sustainable investment rule on debt. The ‘golden rule’ meant that, over the course of the economic cycle, government would borrow only to invest and not to fund current expenditure. The sustainable investment rule meant that national debt, in normal times, should never exceed 40 per cent of national income.

  Behind the new rules and mechanisms put in place were common-sense truths that I hoped would shape public expectations: namely, that public consumption that brought benefits in the short-term should be paid for, but that borrowing was justified in normal times for investment that produced benefits in the long term – just like a family borrowing to purchase a home or a business to buy the seed-corn technology and equipment to become more productive. I felt strongly that previous governments, struggling to bring down public borrowing, had sacrificed the future needs of the country by cutting investment first and by most. I believed that a nation concerned about the future of the economy, public services and our national infrastructure could be persuaded to support investment for the future on this basis.