Back from the Brink

by Alistair Darling

  Opinion among Gordon’s advisers was divided over whether to go to the country early. I put in my tuppence worth when I was asked my view. I said that I was against calling an election. Ed Balls and Douglas Alexander had a strong argument for going to the country now, in order to seek a mandate for Gordon. Ed Miliband was more ambivalent. The problem for me was, what would Gordon say to the country that actually required a new mandate? In what way would he seek to differentiate himself from Tony Blair? What did he want a mandate to do that was different? That was not clear. You only seek a new mandate if you are making a break from the past, or if you want to set out the new challenges you wish to confront and your proposed response to them. There has to be a strong reason to go to the country outside the normal four- or five-year electoral cycle. And to be blunt, you have to be confident that you are going to win. Such a strategy, involving a clear set of policy initiatives, should have been worked up over the summer if it was to have any chance of success in the autumn. As far as I could see, that never happened. Gordon seemed to me to be deeply uncertain about an early election: after all, it was entirely possible that our majority would be cut, or that we would lose and he would be the shortest-serving prime minister ever. And if that was his view, he should have halted the speculation before it ran out of control.

  It was obvious to me even at this early stage of his premiership that there was no sign of clarity or direction. It was all about tactics rather than strategy. No one seemed to be asking the obvious question: what was it that Gordon wanted to do during his premiership? That is something he struggled with for the next three years. The party, and many in the country, myself included, had keenly anticipated his becoming prime minister. Now we needed a clear understanding of what he planned to do. Instead, what we were presented with looked rather like cold political tactics. Then there were the political facts to consider: the polling evidence was sobering. To win a British election you need to win marginal seats, particularly in the south-east of England, where the polls showed the Tories as being ahead. Inheritance tax was identified as a key issue, part of the Tories’ push on property taxes.

  Although Cabinet members were never formally consulted, they soon let it be known what they thought, speaking to Gordon individually. Jack Straw in particular shared my view that you shouldn’t go to the country if you don’t have to, especially if the polls are against you. Jack, a canny operator, who had been an MP for almost thirty years, had a good sense of what would and would not work in politics. He was dead against an early election. So too was Geoff Hoon, the party’s Chief Whip. Geoff and I have known each other for a long time and our children are of a similar age. We first met when he was an MEP and we were both on a committee considering the case for electoral reform, which met for what felt like years on end. We both agreed that an early election could be folly.

  If we were to have an election that autumn, as Chancellor I needed to know as soon as possible. Budgets, by their very nature, are highly political. A Budget produced in mid-term would inevitably be different from one presented on the eve of a poll. I was somewhat put out to find that I was just an accidental spectator at what was potentially a critical point. It was an issue that would come up again and again: either Gordon and I trusted one other, or we didn’t. There was no room for ambivalence. Nos. 10 and 11 have to be in tune. What could be discerned now was more of a discordant hum.

  One morning, just as things seemed to be moving towards an early election, I remember looking into the shaving mirror at the Downing Street flat and thinking, if we get this wrong it will be George Osborne who’ll be seeing his reflection here soon. If an early election were to be called, it should have been announced almost immediately after Tony Blair stood down. It looked opportunistic to be thinking about calling one several months later, in the dark days of autumn.

  When we arrived in Bournemouth, it was clear that the pro-election faction in the Brown circle was in the ascendancy. The atmosphere was febrile. By the Wednesday of the conference journalists were being briefed, anonymously of course, that there would be an election. Then there were angry and rebarbative denials. Having spoken to Gordon, I didn’t think that there would be an election. The problem was that the spin machine was allowed to run out of control and fed the story.

  Confusion and acrimony seeped into coverage of the week’s conference events. Was there going to be an election? Journalists were, not surprisingly, pressing the question. Yes, no, maybe, possibly – it was a mess, and the sense of drift was increasing. The raging arguments between the yes and no camps, the briefings and counter-briefings to the media, made us look shambolic. Thankfully, my visit to conference had to be short and I left Bournemouth the day after Gordon’s speech. In August, he had asked me whether or not I could pull the spending review announcement and the pre-Budget report forward to October, to give us the option of an early election. That presented significant logistical problems in that, on top of Northern Rock, I was having to finalize government spending plans for the next three years at the same time as making a major economic statement.

  The Tories, who had had a bad summer trailing us in the polls, pulled off a theatrical coup at their conference the week after ours. George Osborne announced an inheritance tax break that in any other circumstances would have been seen as unaffordable, as was shown by the watered-down version they came up with following the 2010 election. We should never have allowed one conference speech from the opposition to destabilize us so badly. Gordon went to Afghanistan the day after Osborne’s speech, and this was not well received by the media, who accused him of using the visit to detract attention from the Tory Party conference. There is no convention that says you shouldn’t do anything political while another party is having a conference, it just tends not to happen. In any event, it made us look clunky and opportunistic.

  So, when it finally came, the announcement that there would be no election was a disaster. We had made the fatal mistake of letting events control us. The announcement itself came out in a disorganized, haphazard way, on a Saturday afternoon, accompanied by briefings from the bowels of No. 10, heaping blame on the supposed author of this misfortune, Douglas Alexander. Who told Damian McBride to do this remains opaque. It was extremely hurtful for Douglas, who was a loyal supporter of Gordon and had always been highly regarded by both camps as someone who could see the bigger picture. He did take it very badly when he was dumped on, since it was clear that the briefing was at least tacitly condoned, and certainly wasn’t stopped.

  The election-that-never-was was a massive political misjudgement, from which we never really recovered. The public’s trust was shaken, if not destroyed. We lost any political capital built up over the previous three months. People stopped believing what we had to say. Faced with mounting problems, with the banking crisis fast escalating into an economic crisis, this was to prove fatal. And once trust is lost, it takes years to recover. Gordon found himself in a position in which he had not only to announce that there would be no election, but also to answer the obvious question: why not? He said it was because he wanted time to establish himself. But voters are not daft; the public knew that the reason the election was called off was because we were not sure we would win.

  I was more immediately concerned that I would have to present the pre-Budget report the following week, in the worst possible circumstances. The report had been prepared on the basis that there was to be an election, so it had to include measures dealing with inheritance tax. The election had been called off, but by this stage we were committed to spending a lot of money trying to fix the political problem, at what, in Budget terms, was the very last minute. That meant raising money elsewhere. The politics were awful.

  The Budget statement, which should be a major economic event, is usually presented in March or April. However, since we took power in 1997, there had also been the pre-Budget report to contend with. It was originally designed to report on progress since the Budget and to trail measures that might need to be cons
ulted on prior to the next Budget. In practice, the two events were barely distinguishable. There is much more pomp and ceremony around the Budget, but increasingly the major announcements on tax and spending were now being made at the pre-Budget report stage. This meant that during my time as Chancellor I had to deliver what were effectively six Budgets.

  Most of Gordon’s budgets during his time as Chancellor had not changed the underlying public finances dramatically. What he spent he was able to balance by raising money elsewhere. His macroeconomic policy was concentrated on creating stable economic growth and his balanced budgets earned him the moniker ‘Prudence’. Tax revenues were generated through economic growth and getting a high proportion of people into work. New Labour’s economic policy was built on discounting the old left’s ‘tax and spend’ approach, whereby the country borrows beyond what it can afford in order to finance spending on public services.

  A Budget, or indeed a pre-Budget report, takes months of intense work and planning. You have to decide first what is your forecast for the economy and the level of public finances. Then you have to decide what you want to do in general terms, what in the jargon is called the ‘fiscal stance’. Finally, detailed policies have to be worked up. Over the three years I was Chancellor, Gordon and I spent a lot of time arguing over the first two points, which meant rarely getting to the third. The closer you get to making the announcement, the more difficult it is to change the structure both of the Budget and of the message you want to give. It is a wearing process, especially if there are significant changes in strategy at the last minute. Complex figures have to be presented on the day and last-minute changes may, if you are not careful, result in the published figures being wrong. This reflects badly on the Treasury and can create serious difficulties for those affected by the changes.

  In the late summer, the planned centrepiece of the pre-Budget report was to be the conclusion of the spending review. We had decided in 1997 when we came to power that government spending on public services, such as schools and hospitals, would be fixed for a three-year period to allow for more sensible planning and decision-making. This then became the norm: plans for each successive three-year period would be fixed at the end of the second year of the spending period. This was much better than the previous system, in which spending was fixed from year to year. In stable times, the new system had worked well. Now, however, in 2007, the timing of the spending review could not have been worse.

  In the autumn of that year, the signs of the looming worldwide recession were far from clear. In 2007, it was by no means certain that we were about to enter a steep economic downturn. But by 2008, it was obvious that the assumption that the economy would continue to grow uninterrupted could no longer hold. Had we known what was about to happen, I would almost certainly have fixed spending for the following year, making plans for a further review the year after.

  As it was, I had decided to cut the rate of growth of public spending by half. After ten years of almost uninterrupted increase in public spending, we could afford to do so. There are many who have said subsequently that we spent too much in the previous decade. Back in 1997, however, there was a near-consensus that investment in neglected public services, such as an underfunded NHS and decrepit school buildings, was of paramount importance. There were many reasons for the decay of our clapped-out public services. Crudely put, the main factors began with the UK’s performance as ‘the sick man of Europe’ in the post-war years, with two decades of poor economic performance meaning that we had not received the tax revenues from a healthy economy that would have enabled spending on the public services and infrastructure essential to any modern economy. Then what followed was free-market fundamentalism – Thatcherism – which enshrined the market as the dominant force in our lives; the role of the state was reduced for ideological reasons. In 1997 we had to address the costs of that ideology. Unlike the wealth that never did trickle down, as had been projected, the social costs cascaded down through successive generations. The physical degeneration was real and plain to see: hospitals and schools that had been built by the Victorians, who would never have envisaged them still being in use as we entered the twenty-first century. My own children started school in Edinburgh in a building with outside toilets and one teacher to thirty-four infants, with no classroom assistants.

  There was something of a political consensus, with the Conservatives supporting our spending plans until right up until the end of 2008. The Liberal Democrats gave the impression that they did too, until very shortly after the 2010 general election. Looking at the Treasury books when I arrived in 2007, the structural deficit – that is, the difference between what you spend and what you receive back in tax, which is not merely the result of economic ups and downs – was comparatively small. And the country entered the financial crisis with less public debt than that of most other developed countries – not my words but those of Vince Cable, the Liberal Democrat Shadow Chancellor, writing in 2009. From a broadly Keynesian perspective, he said, it would be damaging to seek to curb the deficit in recession conditions, since that would be likely to deepen the recession. He added that comfort could also be drawn from the fact that developed countries like Japan and Italy operate at far higher levels of government debt than Britain has, or is likely ever to have. Neither of those countries are in good shape economically, but neither has defaulted on debt or resorted to inflation to ‘burn off’ debt. That was in 2006. How he has changed his tune.

  On 3 September 2007 George Osborne committed a Conservative government to matching our public spending totals for the following three years. He pledged two years of 2 per cent increases. The Shadow Chancellor said government spending under the Conservatives would rise from £615 billion in 2008 to £674 billion in 2010/11. The move would create ‘headroom’ for cutting taxes because the economy was expected to grow faster than public spending. What’s more, he added: ‘The result of adopting these spending totals is that under a Conservative government there will be real increases in spending on public services, year after year.’ After the 2010 election, the Tories and the Liberal Democrats spent some considerable time, to good political effect, claiming that the deficit was entirely the fault of Labour profligacy, glossing over their own record of supporting what we were doing.

  Yet, back in October 2007, as I worked on the spending review, I thought that it was time to apply the brakes on the amount we were spending. I am naturally cautious and so I determined that now was the time to rein in the rate of growth in public spending. That would be easily manageable on the back of a much higher level of spending than we had inherited ten years earlier, and would still allow us to continue to improve public services. That was to be the centrepiece of my spending review.

  There was also the vexed issue of inheritance tax. Inheritance tax in this country is paid by very few people. The thresholds are high and it is legally avoidable by those sufficiently affluent to be able to give their estates away, provided they do so seven years before they die. Only the unlucky, or bad planners, are saddled with inheritance tax. Despite this, many people who will never have to pay inheritance tax believe they will have to do so. It is a deeply unpopular tax, except among a minority who believe that the state should redistribute wealth to a far greater extent than it does.

  I had discussed doing something about it with Gordon in the summer before the conference. He showed me proposals that he had considered, but had not pursued, for his last Budget as Chancellor. But following the Tory conference, inheritance tax suddenly assumed a far greater political importance from Gordon’s perspective. I understood that we had to do more than we had originally intended and so I proposed a reform that would have taken more people out of the tax. The Conservatives proposed to pay for their plans by taxing people from abroad who live here but are domiciled for tax purposes elsewhere: the ‘non-doms’. At first sight, it seemed a brilliant wheeze. What better than to tax non-doms who do not have a vote here and whom the public associates with rich bankers. T
he problem is that non-doms also include a large number of people who come to this country to work, not just in banks but in hospitals, universities and restaurants, usually for a period of no more than two or three years.

  The issue became the subject of my first major clash with Gordon. We were in exactly the same place on Northern Rock, but on the economy we were far too often divided. I did not see how we could tax anyone who set foot in the country, no matter for how short a period, as the Tories had proposed. It was also doubtful if it would raise the money we needed. As I correctly predicted, there would be howls of outrage from the better-off, who could well afford to pay but who had easy access to the media, and some of whom even claimed to be Labour supporters. Quite why we were now going to tax the non-doms, having failed to do so for the previous ten years, wouldn’t be clear. It looked like – and it was – a last-minute fix.

  The new government of 2010 never did implement the policy the Tories set out three years earlier, probably for the same reasons I didn’t. My compromise was that the tax would be imposed only on those who had chosen to make Britain their home, by staying here for more than seven years. This allowed for the research scientist, the chef, the doctor, who came to work here for a few years but for whom Britain was not home. After seven years their position would be different; it suggested they were settling here and ought to pay tax. But the inheritance tax plans still had to be paid for, and I did not want to add to our level of borrowing. So I proposed to pay for it by increasing capital gains tax, on things like second homes or paintings, from 10 to 18 per cent.

  At that time we had rules, ‘fiscal rules’ in the jargon, which put limits on how much we could borrow and how much debt we could carry forward. They were an excellent discipline imposed by Gordon in his first Budget in 1997, in order to underline New Labour’s determination to put the health of the economy first. Every British government follows fiscal rules, which change from time to time in accordance with economic conditions. They are there to guide policy. In the 1980s the Tory government was concerned with soaring inflation more than anything else. In 1997 we were concerned with achieving longer-term stability in public finances and economic growth. From 2008, our strategy was essentially to support the economy through the recession and then to cut the deficit once growth was established. The current government, elected in 2010, has implemented what it calls a ‘fiscal mandate’, directed at cutting borrowing.