My Life, Our Times

by Gordon Brown

  I was referred to as the ‘Iron Chancellor’, an epithet I welcomed as I was intent on overturning the past caricature of Labour as ‘profligate’. But it was always important how we talked about prudence: not just for its own sake, but prudence for a purpose. This was the thinking that lay behind my first few Budgets. They were designed to prepare the ground for the long-term investments we planned to deliver further down the line. Critics argue that the prudence of 1997 and 1998 was very soon followed by excess and that this was merely a convenient device to obscure future spending. This is not true: the new investments in our social and economic fabric that followed would be paid for through growth and rises in taxation.

  In my first two Budgets, we took money out of the economy, as we tightened fiscal policy and sent an unmistakable message that we would insist on ‘iron discipline’. Total government spending, which stood at 35.8 per cent of national income before we took power, fell to 34.3 per cent two years later. Even then, we did not relax. We tightened further in 1999–2000 and brought the share of public spending to its lowest level – 34 per cent – since the late 1950s. By 1999, through holding firm against demands for additional spending, we had moved the deficit into surplus and debt was falling as a share of national income. In the next four years, we would be repaying debt. Indeed, such was our commitment to prudence that, when we invented a new form of auctioning for the next-generation mobile-phone licences in 2000 and secured a windfall of £22.5 billion, we used the proceeds to help pay down the national debt.

  Even after we went into surplus, I made a presentation to the Cabinet about avoiding the mistakes of the past: of accelerating spending too fast and taking increasing economic strength for granted at a time when the UK still had a large productivity gap with its main competitors. Attempts to run the economy at too great a capacity, I warned, would stoke up an unsustainable consumer boom and force mortgage rates to rise. We needed a more staged approach: first, stability and prudence to keep interest rates low; second, tackling underinvestment, and then a focus on the nation’s other priorities when they became affordable.

  But there was one other change that we made early on. In 1997, average per capita income in the UK was among the lowest in the G7 group of advanced economies; and what income we had was far less equitably shared. The Wages Councils, which set minimum wages for agriculture, textiles and other low-paid occupations, were now ninety years old and had been reduced by the Tories to nothing more than shells. Their failure was the impetus behind the minimum wage, which was piloted through the Commons with speed by Ian McCartney and Margaret Beckett in the face of objections from a Conservative Party that seemed still stuck in the past. It was a landmark piece of legislation Labour had sought from the days of Keir Hardie more than a century before. But there were two outstanding issues we had to resolve. First, to ensure the minimum wage quickly gained acceptance, Tony and I agreed that we would start from a lower rate than we would have ideally wanted before raising it faster in successive years. Secondly, for fear of undermining the New Deal, we would only gradually bring young people within the scope of the minimum-wage laws.

  We turned to wider economic policy matters and what we could do to enhance competitiveness, enterprise and investment. My analysis was clear: Britain had an inflation-prone, low-growth, low-productivity economy that was suffering from a chronic lack of investment.

  Britain’s poor productivity had been our Achilles heel: raising it and our levels of investment were at the forefront of our economic aims. In 1964, Harold Wilson and George Brown had created the Department of Economic Affairs to pursue the growth agenda; in contrast, we worked through the Treasury with a new Enterprise and Growth Unit overseen by Geoffrey Robinson. Our successes included the R&D tax credit which was taken up by 6,000 businesses, the ten-year science plan announced in 2004, enhanced collaboration between universities and business, and tax incentives to encourage investment in areas like information technology.

  Having introduced an independent monetary policy, I pressed for an independent competition policy – arguing in the 1999 Budget that cartels and anti-competitive practices had to be broken if we were to expand opportunity for new competitors. And with the Treasury pushing a new Enterprise Act in 2002, we empowered two bodies independent of government – a beefed-up Office of Fair Trading and a Competition Commission – to clamp down on anti-competitive practices. We sought advice far and wide – not all of it was to prove useful. A 1998 review by the North American division of the management consultants McKinsey came out with one surprising conclusion. When they observed our well-known hotels were too old and used space inefficiently, we had to point out that ancient buildings and our heritage were among our most important tourist attractions.

  In my first Budget, I reduced the rate of corporation tax from 33 per cent to 31 per cent and by 2007 had brought it down to 28 per cent. But I was attacked for simultaneously withdrawing the payable tax credit on dividends, and, while it was accepted that this removed what had been a disincentive to investment, I was to be accused for the next ten years of taxing pension funds and thus ruining final-salary pensions – an unfair allegation, as the evidence I brought before a rowdy debate in the House of Commons in 2007 proved. I wanted to do even more to help small businesses, reducing their tax rate to 20 per cent in 1998 and for some of the smaller start-ups to 10 per cent in 1999 – later lowering it to zero for some. In 1997 there were 3.7 million small businesses and 3.4 million self-employed. By 2010, the figures had risen by nearly 2 million in total – 4.8 million and 4 million respectively, despite a debilitating recession.

  The annual cycle of economic decision-making now started with the Pre-Budget Report in November or December, months in advance of the Budget itself. Total public spending – previously decided year-to-year in constantly changing announcements – was now subject to a longer-term set of disciplines we had thought through in opposition: a system of public spending reviews which would plan and set limits three years in advance.

  The theme of each review, starting with the Comprehensive Spending Review of 1997–8, was money only in return for reform. The Treasury may have lost one empire – the control of monetary policy – but it had assumed an even bigger task in long-term fiscal management and overseeing public sector reform. The success or failure of our delivery of public services was now measured not by the Treasury’s traditional focus on inputs – what was spent – but on what really matters: outputs and outcomes. What counted now was not simply the level of spending but whether programmes achieved their stated purposes and what difference they had on people’s lives. Each department would now have to sign a three-year contract with the Treasury, known as a Public Service Agreement, on delivery of specific and measurable targets. I chaired the relevant Cabinet committee to hold ministers to account. This was seen by many as a Treasury power grab. In reality, it was necessary to assess continually not just whether departments were coming within their budget limits but also whether they were delivering results.

  By 1999, with debt falling and these new systems in place, we were now in a position to do much more to address the inequalities distorting Britain. The issue we would now tackle head-on went right to the heart of British society – tackling poverty, increasing investment in public services and narrowing the economic disparities between the north and south that were being highlighted by John Prescott. The prudence we had shown in our early years had been for an even bigger purpose. The outcome of our 2000 Spending Review – average real-terms growth in spending on public services of 5 per cent a year, compared to 0.7 per cent under the Tories – represented the biggest sustained increase in expenditure for thirty years. What’s more, whereas in the period 1979–97 42 per cent of each pound of additional total public spending had been allocated to debt interest and social security expenditure, the figure was now only 17 per cent – leaving even more for health, education, transport and social policy.

  There was one other set of initiatives vital for invest
ment in our economy and public services – public-private partnerships or PPPs. For some, PPPs were simply a halfway house to privatisation. The public sector, they said, handed over control of projects to private contractors who, in return for paying upfront capital costs, charged exorbitant interest rates over the next thirty years. For me, PPPs looked different: they were a way of mobilising private funds for public purposes and offered a better route to building our infrastructure than the old ways of financing. After all, we had always hired private builders to construct our schools, hospitals, roads and public buildings. But we had enjoyed little control – leading to run-on costs, delays and often poor quality. With PPPs we were not only mobilising private sector skills for public purposes, ending the sterile and self-defeating battle for territory between public and private sectors, but building in tougher contractual requirements that secured far better value for money for the taxpayer. There were to be teething problems – some projects were poorly structured – and in an environment of low interest rates, legitimate issues about the rates of interest being charged. But, at their best, PPPs married the long-term thinking and ethos of the public sector with the managerial skills of the private; and, in truth, we could not have commissioned more than a hundred hospitals and built, rebuilt or refurbished 4,000 schools by 2010 if we had not.

  Our spending reviews were not just about domestic services: they were designed to create the resources we needed for defence, security and international development. The first review of defence spending ended in what I was later to realise was the normal way of doing business – a threat to the existence of Rosyth Dockyard beside my constituency if the Ministry of Defence did not get the best deal. Nevertheless, we were able, in successive reviews, to finance both the strategic and day-to-day requirements of the Ministry of Defence.

  The spending reviews also offered me a chance to begin the work I had set my heart on: increasing international development aid to the poorest countries. I had hoped to do something to make a difference on world poverty ever since I was a child contributing articles and raising money for the Freedom from Hunger campaign. But it was only when I started to make visits to Asia and Africa that I saw at first hand the scale of poverty and yet the enormous potential of these two great continents.

  Like Tony, I wanted international development to have a far stronger profile. To this end, he had established the new Department for International Development under the dynamic leadership of Clare Short. It was not simply about projecting ‘soft’ power as was often the case in the past; it was about doing what we could to eradicate global poverty and improve development. Our approach stood in marked contrast to the Tories, who in the 1970s abolished Labour’s Ministry of Overseas Aid and subsumed its responsibilities within the Foreign Office. It was Barbara Castle – Harold Wilson’s first minister for overseas aid – who defined the role Clare now discharged as ‘a guarantee that overseas aid was no longer to be regarded as a charitable donation from rich to poor but an essential element of world development’.

  Clare and I worked well together. When we took over, overseas aid was only 0.26 per cent of UK national income, just a fraction of the 0.7 per cent target set by the United Nations. We were spending only one pound for every three needed to meet the target. To raise spending on international aid overnight to 0.7 per cent was an impossibility given the multibillion costs involved. But Clare and I devised a plan to raise spending gradually, first to 0.5 per cent, then 0.6 per cent and finally to 0.7 per cent; and, by reprogramming aid to focus on the needs of the most vulnerable and by untying it from defence and other contracts, we used it more effectively to reduce poverty. Our changes counteracted what was anyway a false claim that aid was taxing the poor in rich countries to hand over cash to the rich in poor countries.

  Debt relief was a much more controversial issue. Thanks to the work of a very thorough and gifted researcher, Sandy Hunt, I had been able to argue from the early 1990s that interest now being paid on Africa’s debt was syphoning off money that could be better used for education and health. Shriti Vadera, who would next help me plan for 100 per cent debt relief, was at once a master of the technical detail and awash with innovative ideas. In 1997, at the Commonwealth Finance Ministers’ Conference in Mauritius, I made one of my first speeches as chancellor calling for widespread relief of debt. I argued that, under current plans, only one or two countries would ever secure the relief from unpayable debt that the international community had promised. I therefore proposed 90 per cent relief as a first step to eradication of all the debts of the poorest countries. At the conference, we also agreed to take on corruption in a far more sustained way. I had already acted in my first Budget to remove the tax reliefs that until 1997 had been available on bribes that companies paid to win foreign contracts. It was something of an irony that a few hours after my speech in Mauritius, when flying to Thailand via South Africa and refuelling in Madagascar, that the airport head demanded a bribe before allowing the plane to leave. The very civil servant who had helped write the speech demanding we outlaw all forms of bribery was preparing to pass his last dollars to the blackmailer when a Russian Aeroflot plane carrying hundreds of passengers – and thus more lucrative business for the airport head – arrived, and we were allowed to leave without charge.

  When later that year the G7 finance ministers met, I once again tried to open the question of debt relief. I got nowhere – indeed, my fellow finance ministers said that the issue had been fully dealt with and initially even refused to countenance its inclusion on the agenda. Luckily, my international colleagues were coming and going at a rate of knots: I was the second-most senior of the whole G7 within eighteen months. So, step by step, we reopened each of the issues preventing full debt relief and won over France, Italy and Germany. Crucially, at a 1999 meeting of the World Bank, the Americans finally agreed to a 100 per cent cancellation. But then there was a change of US president, and we had to start again.

  The battle over debt relief and the challenge of meeting our aid target galvanised my efforts to play a bigger role in international development from the Treasury. It brought a fresh purpose into our politics. I genuinely felt that the fiscal discipline we had shown in the first two years – and beyond – was for a worthwhile cause. Yes, we spent a long time telling people what we could not do, but I never gave up on the longer-term vision I had: supported by a new, tougher, fiscal framework, we could now sustain the increases in public spending, the improvements in public services that were desperately needed, and our plans for the reduction of poverty. A long and difficult battle lay ahead. But my mind was made up. The Treasury would next turn to addressing children’s and pensioner poverty. I had in mind a bold endeavour to fight a war on poverty – to create a form of payment that would be neither a social security benefit nor a tax relief. First, though, we had to persuade the country that our tax system had to change.

  CHAPTER 7

  TAX AND THE BRITISH – AND THE BATTLE AGAINST POVERTY

  Margaret Thatcher always saw them as symbols of the country she believed in. Try as they did, Nigel Lawson and Norman Lamont could not change them in the way they wanted. Tony Blair was reluctant to abolish them, though he recognised that they had no economic logic. Labour pollsters were aghast when we tried. But, in one fell swoop in the Budget of 1999, we swept aside two British institutions that symbolised a bygone age so we could use our nation’s scarce resources for our priorities.

  One was mortgage tax relief, the tax break given to homeowners by the state, and the other was married couple’s allowance, the tax break that symbolised the importance our society attached to the institution of marriage. Attitudes to reform of both were indicative of something even more entrenched in society – the British people’s suspicion of taxation. But our aim was not ‘taxation for taxation’s sake’. Spending, as we then did, £3.5 billion a year on these two tax reliefs deprived us of the resources we needed to meet a national emergency.

  The changes we proposed on mortgage
tax relief and married couple’s allowance were the first skirmish in our longest battle, success in which had proved elusive for decades: to wage and win a war against poverty. First, we had to break the rise in child poverty – and then stage by stage eliminate it. At the turn of the century we would publish our timetable for the abolition of child poverty. By 2010 we would have binding legislation in place. The new law would require government to end child poverty by 2020.

  And we would achieve our objectives in new ways. Working from ideas our team had formulated in opposition, we planned to introduce a wholly new line of support for millions of low- and middle-income families – tax credits. This new form of help was neither a social security benefit nor a tax cut. Why did we do this? The former – welfare payments – would not get to all of the low-paid households in poverty whom we wanted to reach. The latter – a tax cut or a rise in allowances – would be spread too thinly.

  The same was true of the new benefit we introduced for the over-sixty-fives: pension credit for those below or just above the poverty line. A blanket rise in the old-age pension would give only a few pounds to 9 million elderly citizens, while a rise in supplementary benefits for the extremely poor would miss millions of pensioners at or just above the poverty line, many of whom had only small occupational pensions which deprived then of any means-tested supplement.

  Year by year we would expand both tax credits and pension credit. By 2010, tax credits were worth £80 a week to the average family in receipt of them, and nearly 3 million pensioners would benefit from pension credit. It was as near to a revolution in our tax-and-benefit system as we have seen in Britain. Our reforms were for a purpose: to eradicate child and pensioner poverty in one generation.