My Life, Our Times

by Gordon Brown

  With the British general election looming, it was a race against time. We were caught between our desire to announce the policy before election day, showing the progress we had made, and the complicated process of working out and agreeing details with the rest of the world. In the end Barack told me that there was no chance of Congress passing it at this stage. I replied that he had European support and it would be enough for him to say that he planned to deliver the policy in his second term. In the event, it was the election here in Britain that proved fatal. The new Conservative–Liberal Democrat coalition elected in 2010 were so dead set against such a levy that even as Chancellor Merkel and President Sarkozy continued to support it – and it remains even now on European Union policy agenda – any chance of international cooperation had passed. It is, however, an idea whose time will come.

  It is remarkable how little has changed since the promise in 2009 that we bring finance to heel. As I write today, the banks that were deemed ‘too big to fail’ are now even bigger than they were. Similarly, with inadequate oversight of shadow banking, with exotic new financial instruments like collaterised loan obligations and without, as yet, a proper early warning system, some regulators freely confess that risks have morphed and migrated out of the formal banking system, and if the next crisis came they would still not know what is owed and by whom and to whom. 2009 has proved to be the turning point at which history failed to turn.

  Dividends and bankers’ pay today represent almost exactly the same share of banks’ revenues as before the crisis hit. While bonuses have fallen from their £19 billion high in 2007–8 to around £14 billion last year, the financial sector has paid out a total of £128 billion in bonuses since 2008 – enough to recapitalise our banks. Moreover, the fall in bonus payments does not mean bankers are being paid less. After the European Union capped bonuses at a maximum of 200 per cent of salary – a move fiercely opposed by the coalition government, who excluded asset managers from the cap – the banks circumvented it by introducing a new category of remuneration called ‘fixed pay monthly allowances’ and raising salaries. The typical senior banker earns £1.3 million and Britain has three-quarters – more than 4,000 – of Europe’s €1 million bankers, a figure that has risen 50 per cent since the crisis. Even at RBS, which has had £58 billion of accumulated losses and is guaranteed by the taxpayer, the number of bank employees earning more than €1 million has barely changed – 121 down from 131. We still do not have the right balance between the capital that banks need, the dividends they pay, the remuneration they give employees, and the contribution they make to the public for the social costs of their risk-taking.

  One of the arguments for high pay in the banking sector – that they take risk – has not survived the crash. With many banks back-stopped by the taxpayers, they make their profits at least in part because of the government guarantee. The risks they are taking are often not with their money but with ours. And often bankers are not being compensated for risk but rewarded for failure. It cannot be right that Fred Goodwin walked away with all of his past bonuses untouched, a reported tax-free lump sum of £5 million, and even after he agreed to halve his pension it still amounted to £350,009 a year.

  If bankers’ conduct was dishonest by the ordinary standards of what is reasonable and honest, should there not have been prosecutions in the UK as we have seen in Ireland, Iceland, Spain and Portugal? While the new criminal offence of reckless misconduct in the management of financial institutions is intended to deter irresponsible management decision-making within banks and building societies, defendants will likely argue that their institution was in difficulty more because of fluctuations in interest rates or exchange rates, inter-bank illiquidity, or even regulatory changes imposed by government, rather than their own conduct. The Fraud Act 2006, which criminalises fraud by false representation, failing to disclose information and abuse of position, may be more relevant. If bankers who act fraudulently in this way are not put in prison with their bonuses returned, assets confiscated and banned from future practice, we will only give a green light to similar risk-laden behaviour in new forms.

  The crisis not only exposed the flaws of neoliberalism but reinforced my view of the need to change the way our international institutions operate. If the roots of the recession lay in global imbalances between producer economies with high levels of savings, such as China’s, and consumer economies, like those of the US and the UK, weakened by high levels of personal borrowing that arose in the wake of stagnant wages and rising inequality, then we needed – and still need – better management of the global economy to address these underlying problems. Supra-national bodies like the IMF, the World Trade Organization and the Global Stability Forum have a larger role to play but, dominated by unelected experts, their detachment and distance from national electorates and civil society is no unalloyed virtue. One way we can combine the need for expertise, for accountability and for decisive economic leadership that can deliver is a better organised and broader G20. It should not have to take yet another crisis for this to happen.

  The London G20 drew a line in the sand. The leaders of the world agreed on concerted action that may have saved the world from a second great depression. We forged unprecedented global cooperation, which is what I had been fighting for all along. We understood that each country’s national interest could best be protected and advanced by cooperation between all countries. We could have done more – growth and prosperity since 2010 has been much lower than it might have been – and still can. But while the crisis brought about international cooperation, this has since waned as countries have retreated into their national silos. Even so, I think of what was achieved: we found a way through a global crisis. It was not what I had envisioned spending my time on when I became prime minister, but any leader must be prepared to deal with unpredicted and potentially shattering events. More than this, we would leave behind a model, a way of working together, that could shape global financial cooperation to prevent and deal with crises in the future, and we had shown that, even though nothing in global cooperation will ever run smoothly and no outcome is ever guaranteed, it is possible to create a worldwide coalition for change. In the spirit of my old school motto, I had done my best.

  CHAPTER 17

  FIGHTING OUR WAY OUT OF RECESSION

  Buried away in the library of the Treasury was a forgotten memorandum that I discovered. It was written in the 1920s by the world-renowned economist John Maynard Keynes – and in it I found a note inscribed on its first facing page. The words had been scribbled on the document by one former permanent secretary about proposals from a far greater economic mind on how to tackle the recession of the day. When, long before his General Theory of 1936, Keynes had proposed public works, fiscal expansion and short-term deficit financing to lift the economy out of a downturn, the permanent secretary of the day dismissed him in three words scrawled across the page: ‘Inflation. Extravagance. Bankruptcy.’

  Understandably the 2008 global financial storm dominated the modern Treasury’s thinking in a way no other issue ever would, and what to do about deficits again became a burning question eighty years on. Would we learn anything from the 1920s and 30s? Would the orthodoxy of balanced budgets and aversion to debt have too strong a hold on public opinion? Would the same official mantra rejecting public works and temporary deficit financing as ‘inflation, extravagance and bankruptcy’ hold? Given an embedded mythology hostile to debt and deficits, could I ever do enough to convince the general public to trust us to get it right in a crisis?

  By the autumn of 2008 it was clear to me that monetary policy by itself was insufficient to counter a fast-worsening downturn and clear too that we had to act quickly. I knew from history that once recession took hold and gripped our economy, it could not be readily reversed; and I was well aware of the evidence that our economy would succumb to what economists called ‘hysteresis’ – low levels of demand that eventually destroy supply and turns cyclical unemployment into structural un
employment as more and more of the unemployed see their skills atrophy, and a future recovery moves further out of our reach.

  The answer, as Keynes had taught us, was to increase spending, reduce taxes and run a deficit: higher levels of government spending directly increase overall demand, while lower taxes increase the after-tax incomes of households, enabling them to spend more and add to that demand. And if monetary policy has exhausted its potential to stimulate growth, and if there is no inflationary risk alongside mass unused capacity which might be permanently lost, then there is no reasonable argument against the principle of a counter-cyclical fiscal stimulus. This was, indeed, a circular process. Getting the economy back to growth was itself vital to cutting the deficit. Indeed, the Office for Budget Responsibility has recently suggested that the long-term growth rate of the economy is the single most important determinant to the health of the public finances.

  Britain was, in fact, the first of the recession-hit countries to act – in the autumn of 2008, when in an emergency Budget in all but name, Alistair Darling introduced a Small Business Finance Scheme to support up to £1 billion of bank lending; a £145 income tax cut for 22 million basic-rate taxpayers; a year-long VAT reduction from 17.5 per cent to 15 per cent; a £3 billion capital spending programme for transport, housing, the NHS and education; and brought forward increases in the old-age pension, child benefit and the child tax credit.

  I knew that, as the economy crashed, mothers and fathers were sitting at their kitchen tables in the evenings worried sick as to whether they would lose their jobs; and, if they did, whether they would then lose their homes. So, mindful that homeowners had been hardest hit in previous recessions, those who lost their jobs or saw wages fall would now have the right to defer unpayable mortgage interest for up to two years. We gave guarantees to Britain’s main mortgage lenders that protected those with home loans up to £400,000 from repossession even if six months in arrears. None of this could prevent a 60 per cent slump in mortgage lending over the next few months; but, fortunately, the number of homeowners who held mortgages – 11.8 million in 2007 – kept relatively steady at 11.4 million.

  Of course, people do not think back to what might have happened and how repossessions which at one point seemed inevitable – and hit America and countries like Spain much harder – were avoided in Britain. But in the most difficult year, 2009, the homes of only 0.42 per cent of mortgage holders were repossessed, a rate just under half that in the 1990s recession.

  Banks would not lend to small businesses. Shriti Vadera and later Peter Mandelson – and I – spent more hours cajoling banks to lend than on almost anything else. Both the Treasury and Bank have since had to radically extend the range of assistance they offer, but then by trial and error we moved from credit guarantees to the working capital guarantee to tax deferrals. And while America lost 170,000 small businesses in just two years, 160,000 British businesses were shored up by delaying £4 billion in tax payments. As a result the rate of company liquidations was just 0.9 per cent in 2009, and compulsory corporate insolvencies ran at half the rate of the 1990s recession.

  Alongside generous new allowances for new investment, £750 million was spent underpinning the sectors we knew were vital to our recovery: the car industry, house-building and low-carbon technology.

  Paying people to scrap their old car and buy a new one may have sounded like a gimmick. When I first looked at it I thought so myself. But when I saw the facts I quickly changed my mind. Vehicle production in the UK had collapsed – falling by over 50 per cent between the start of 2008 and early 2009. The fate of some of our best-known car producers – even that of Ratan Tata’s Jaguar, rebuilt by this very modest man with extraordinary skill – appeared to be hanging in the balance. The car scrappage scheme, which lasted from July 2009 until Easter 2010, offered car owners a £2,000 incentive, half of it paid for by the government, to give up their car and buy a new one. It was boosted by lower VAT until January 2010. At a cost of £400 million it generated nearly 400,000 new car purchases at a time when the auto market most needed assistance. One in five of all new cars registered in the UK – smaller cars and the most environmentally efficient ones being most popular – came through the scheme. One report suggested that as the average emissions of new cars was 25 per cent lower than those of the old that the car scrappage scheme had done more for a cleaner environment than any previous measure.

  Our initiatives, not least the cut in VAT, were designed not just to save individual businesses from collapse but to increase overall demand in the economy. However, while we argued that a time-limited but unexpected cut in VAT, like temporary increases in government spending, would provide an effective stimulus to aggregate demand, we were initially condemned by Germany and France – before they later moved in a similar direction.

  In the end, almost every country went for large-scale stimulus – Germany’s stimulus package was €59 billion, France’s €26 billion, with the EU as a whole committed to €200 billion. In turn, India committed $38 billion to fiscal expansion, Russia $53 billion, Japan $298 billion, China $585 and America $787 billion.

  The post-2010 rewriting of history – to forget that deficit financing was critical to emergence from the crisis – is to deny that alongside quantitative easing our concerted fiscal stimulus drove the economic recovery. A British recovery that started from spring 2009 speeded up with 0.4 per cent growth by the fourth quarter of that year, leading to even faster growth by mid-2010 than in 2007. But this was then killed off by austerity.

  Well aware that good employment news tended to lag behind other economic indicators we spent a total of £5 billion on jobs. Summer school-leavers and then all long-term unemployed under-twenty-fives were guaranteed training or jobs. While unemployment did rise – from a pre-recession 5.2 per cent to, very briefly, 8 per cent at its pre-election peak – it never approached the levels of 10 per cent and over in the Eurozone and America. And, in a far deeper recession, jobs losses were a fraction of the 1.5 million jobs lost in the 1980s and 90s. It was a costly irony that the high point of British unemployment – 8.4 per cent – came more than a year later at the end of 2011 after Labour’s stimulus had been replaced by coalition austerity.

  My whole childhood experience, witnessing the damage unemployment could do, strengthened my resolve to act – and to fend off criticism about the fiscal cost of doing so. I did not want ever again to see another lost generation permanently shut out of opportunity or families forced to leave their own homes. Doing what was right carried a heavy political price, but as I told Sarah: ‘If the choice is between doing what is popular and what is right, I will do what is right.’

  In the worst global recession in eighty years the rates of redundancies, repossessions and bankruptcies in Britain were about half of what were suffered in the previous two recessions. But as we paid out more to prevent unemployment, bankruptcies and repossessions, falling output meant less in revenues – less VAT receipts as people bought fewer goods and services, less income tax as employment fell and earnings stalled, less stamp duty as the housing market slumped, and less corporate taxes as businesses retrenched. In the 2007 Budget, I had projected tax receipts would rise over the following three years to an estimated £616 billion by 2009–10. In total, we received £164 billion less than expected. And while some outlays were recouped with a new payroll tax on the banks, which raised £3.5 billion, and later the introduction of a new top rate of tax of 50 per cent for those earning over £150,000, public sector net debt increased from 35.5 per cent of GDP in 2007–8 to 64.8 per cent in 2009–10.

  I take some pride that we did more than any other government to cushion the shock and pain of the economic downturn. Without this the recession could have descended into a depression. Action was even more urgent in Britain because we have historically depended more on the sectors which collapsed: UK economic activity is far more heavily dependent on trade than other countries, like the United States, while financial services represent around 8 pe
r cent of our national income.

  Because we had cut debt as a percentage of our national income between 1997 and 2007, keeping it below 40 per cent throughout and repaying debt in four successive years around the turn of the century, it had not been an issue of much public concern for ten years. But as an issue it had never gone away. Our fiscal rules demonstrated that, under all normal circumstances, when the economy was growing, we would not rely on borrowing to finance current expenditure. We had recognised the popular aversion to debt by paying for our NHS improvements with a tax rise, when we had taken time to explain what a National Insurance increase would achieve for the health service. I hoped the public would trust us to get things right.

  After 2005 we announced that the catch-up period in public spending – the time when we dealt with the historic and chronic underinvestment in public services – was at an end. Furthermore, in the Comprehensive Spending Review published in February 2007, just before I became prime minister, we halved the growth of public spending from the 4 per cent a year of the previous eight years to 2.1 per cent per year for 2008–9 to 2010–11. Public spending would now grow more slowly than the expected growth rate of the economy.

  In a presentation given to Cabinet in 2005, I also called on the pay-review bodies to deliver lower settlements. A new rule was laid down that no significant public sector pay rises could be approved without Treasury agreement. Having achieved greater efficiency in the use of resources, we had also started to cut the public sector workforce from 2006. While the government pay bill had grown after 2000, this period of catch-up was followed by a sharp fall in the growth of staff costs between 2006 and 2009. In real terms, compared with CPI inflation, general government staff costs increased by just over 6 per cent a year during the period of catch-up in 2000–6, but growth fell to just 0.2 per cent a year between 2006 and 2009.