These rules are not contained in an Act of Parliament, although ours were referred to in legislation, in a Finance Act. They are there as a yardstick, so that commentators and analysts can judge fiscal measures against the government’s stated objectives. Ours were quite simple: they were principally designed to prevent borrowing to fund day-today government spending, and to bear down on debt. We had stuck to them over the ten years since we were elected in 1997 and official figures showed that they had been met during that long economic cycle. I later abandoned them as the economic crisis deepened, because to stick to them would have been perverse in the face of the worst downturn of recent times. However, in the autumn of 2007 the rules stood, and they meant that if we were going to give away money by taking people out of inheritance tax, then money would have to be raised elsewhere, or spending cut.
Both issues of contention – the non-dom tax and the increase in capital gains tax – took up days of increasingly fraught discussion between Nos. 10 and 11. There was much plodding between the Treasury and No. 10, lots of sabre-rattling. The worn carpet in the corridor leading to the PM’s office became ever more threadbare as groups of advisers trooped in to give their advice, before stomping back out again. There was a considerable amount of squaring up between officials on the two sides of the negotiations.
Even after the announcement, several months were spent trying to get the policies right. In tax matters, the devil is in the detail, and you cannot safely make big changes in a hurry without thinking through the consequences for taxpayers at every level. The controversy over capital gains tax may have been largely confined to the business pages, but there was another tax problem that would cause us acute problems over the next year.
In his final Budget as Chancellor, Gordon had abolished the 10p rate of income tax, leaving the UK with just two rates of tax: a higher rate of 40p, and the lower rate of 20p. In his ten years as Chancellor, I think Gordon had discussed with me most aspects of his Budgets and pre-Budget reports. We talked more easily in those years. I remember discussing his plan to cut out the 10p rate at the end of 2006. I could see the attraction of a simplified tax system but, I said, we had introduced it back in 1998 to get the lowest earners in the country out of tax and there would surely be many losers from its abolition. His reply was that when we introduced the 10p rate, tax credits were not yet in place. In addition to that, taxpayers at the top of the scale also benefited from some of their income being taxed at the 10p rate. He was right, in that tax credits had provided a huge boost to the incomes of families with children on low and, in many cases, middle incomes. Although the tax credit system has been criticized as being overly complicated, it was part of a move, which I strongly supported, to make work pay. It took some years to try and resolve the complexities inherent in a system that has to take account of ever-changing incomes, but the tax credit policy itself is sound and has survived the transition to a new government.
The problem was that while many qualified for tax credits, many did not. It was not so easy to see how the losers could be compensated for the tax increase that would result from more of their income being taxed at a higher rate. Our conversations concluded with Gordon saying that more work was needed to deal with those who faced losing out from the abolition of the 10p rate.
When it was abolished in the 2007 Budget, Gordon announced measures that compensated many taxpayers, mostly those with children. But a few months later, when I sat in his old seat in the Treasury, looking over the books, I saw advice that painted an extremely bleak picture. While 80 per cent of households would see no effect on their incomes or would even benefit from the change, about five million households stood to lose out. The losers ranged from those on pretty low incomes through to households where there was one earner who could be earning more than £100,000 but with a partner who had lost out. Alarm bells had rung when I received a letter from an elderly constituent just after Gordon’s final Budget. She was aged over sixty and had calculated to the last penny how much she was going to lose. What was surprising was that so few others had picked up on the problem until the following spring, just as it was due to come into effect.
As it was, in the autumn of 2007, I was told that it would cost about £6.5 billion to ensure that there would be no losers. It seemed an enormous amount of money. A year later, it would seem small beer compared with the £50 billion cheque I had to write to forestall a global banking collapse. In my pre-Budget report, however, knowing that our financial room for manoeuvre was so limited, I did not try to find another £6.5 billion in the short time available. I would have to return to it later on.
All political statements, especially Budgets, are framed by the environment in which they are made. By the time I stood up in the House of Commons on Wednesday, 13 October 2007, the Tories were ahead in the polls and had very good reason to be cheerful. After ten years in the doldrums, they were now out in front. The commentators were faced with a government that had been battered by Northern Rock and had then clobbered itself over the election-that-never-was. The pre-Budget report failed to do what it should have done. It was cobbled together and did not set out a compelling story on the economy or the banking crisis; far from our regaining the political initiative, it slipped even further away. Why did I agree to include the inheritance tax measure at all? In political terms, the answer is that if we were to fight an election we had to have something to say about the tax, since all the polling evidence showed that it was a problem for us. When the election was called off, we were too far down the track to remove the measure. It would have meant recasting the pre-Budget report, with all its complex interlinked financial implications. But there is another factor. My instinct was to support the Prime Minister, as I had done for the best part of fifteen years. That loyalty was to be severely tested over the next three years.
That pre-Budget report was a low point in my time as Chancellor. It was going to take some time to recover my position, and unfortunately there was a lot more bad news to come. While we had been preparing the report, there were signs emerging that Northern Rock’s problems were beginning to spread. We were worried about Alliance and Leicester, whose directors still believed they could sit it out. There was also concern about Bradford and Bingley, which was very exposed to the buy-to-let market, and whose reliance on borrowers correctly certifying their own earnings, with minimal checks, was alarming.
Then there was HBOS, the result of a classic marriage on the rebound in the late 1990s, when the Bank of Scotland had mounted an audacious bid to take control of one of Britain’s biggest banks, NatWest. Seeing what they were up to, their Edinburgh neighbours and rivals, RBS, made a counter-bid, and won. Bank of Scotland, which was a douce, medium-sized, well-run bank, felt it had no alternative but to do a deal with the Halifax, then Britain’s biggest mortgage lender. HBOS was never a happy union. It was clear that the Halifax was the dominant partner, sometimes referred to by Bank of Scotland staff as ‘The Haliban’. By 2007 it was becoming clear that HBOS was losing money, not through involvement in complicated financial dealings, but through bad judgement on commercial loans.
It was little comfort to know that other countries were facing the same problems, and that other banks overseas were in deep trouble. On 4 November, Chuck Prince resigned as chief executive of Citigroup. It was revealed that Citigroup faced an $11 billion loss on mortgage-related securities. Prince was the man who had famously said: ‘As long as the music is playing we will keep on dancing.’ Clearly the ball was ending all over the world. Then, seemingly out of the blue, I had to deal with an unexpected home-grown drama.
In early September, we had moved into the flat above No. 10 which, until Tony Blair’s time, was where prime ministers lodged. Tony, and then Gordon, lived in the larger, more secure flat attached to No. 11 – although, confusingly, it is actually part of No. 12. This made sense because both had young children and needed the space. There is no real separation between the three buildings: there are spiral staircases, corridors
and rooms attaching each space to the next.
For the first few months as prime minister, Gordon operated out of Tony Blair’s old study next to the Cabinet Room in No. 10. There was a winding staircase down to the outer office from our flat. He then moved his office to a big open-plan space, formerly the Chief Whip’s office, in No. 12. Between Nos. 10 and 12 is, of course, No. 11, which the Treasury has jealously guarded against predatory claims for extra space from the Prime Minister’s office. The corridor between No. 10 and the new office chosen by the Prime Minister as his nerve centre runs straight through No. 11. Over the next three years it provided me with an unexpected spectator’s view of traffic into the Prime Minister’s office. Gordon, in turn, had to be fielded through the crush of visitors to receptions in No. 11, negotiating his way past young people dressed as elves and fairies at festive charity parties, or, on one occasion, bumping into a goat belonging to a Welsh guardsman who was leading children from a hospice out to the garden. Privacy was at a premium.
No. 11 is a small Georgian house, built by an early property developer, George Downing, as a speculative sideline to his day job as a spy. Now a bit tattered and faded, it was decided before we moved in that the public entrance needed a fresh coat of paint, as it hadn’t been done since the early 1960s. A cheap job was not, apparently, an option. It is a historic space and had to be properly conserved. The paint colour they chose made us laugh: it was called ‘Drab’, and so it was. The entrance hall had portraits of two of Britain’s most famous Chancellors, Gladstone and Disraeli, glowering darkly in the light of 20 watt bulbs. Living at No. 11 is something I never took for granted, especially when I used to see the extent to which people from all walks of life, prime ministers and presidents, schoolchildren and statesmen, excited family and friends, valued the chance to walk through that famous door. We were always careful to warn them not to trip over the carpet patched with sticky tape.
After another week in Downing Street we decided to escape this febrile atmosphere and head home to Edinburgh for the weekend of Saturday, 10 November. It was a rare visit, for we ended up living ‘above the shop’ in Downing Street far more than we had anticipated, as a result of crisis heaped on crisis. The original plan had been that Margaret would be wherever she was most needed, at home in Edinburgh or at the flat in Downing Street. It was the first time she and I had lived together full-time since we were married. Before I entered Parliament in 1987 she had worked as a journalist in Scotland. On the Glasgow Herald she was frequently on the night desk. I was an Advocate at the Scottish bar and frequently away from home. After being elected, we chose to live in Edinburgh, and I was routinely in London from Monday until late Thursday or Friday morning. Margaret’s work was in Scotland and we wanted to bring up our children close to family and friends. By the late summer of 2007, however, it was clear that it would be easier to live in Downing Street. The cost of making our London flat secure would be difficult to justify. Our son, Calum, was away at university; our daughter, Anna, had finished her exams and was delighted that we should leave her room to party. But I did look forward to visits home to Edinburgh and to tending our much-neglected garden. And, of course, I had my duties as a sitting MP, holding constituency surgeries, but too often it was just a flying visit.
That weekend was the first in a long time that was relatively free from crisis. It was not to last long. We were eating bacon rolls and reading the papers when my duty private secretary rang. The chairman of Her Majesty’s Revenue and Customs (HMRC) was on the line, and it was urgent. HMRC is responsible for collecting taxes in the UK. It is independent from the Treasury; rightly, ministers are kept well away from the affairs of individual taxpayers. Unfortunately for me, though, the Chancellor is still accountable to Parliament for whatever HMRC does. To be phoned on a Saturday morning could only be bad. What followed would have been the stuff of a Whitehall farce had it not been so serious.
HMRC is responsible for paying Child Benefit to everyone with children in the UK. Like any other government department, it is audited by the National Audit Office (NAO), again entirely independent of the government. Earlier in the year, a hapless voice explained, an official within HMRC was asked to send NAO a full copy of all data held by them relating to Child Benefit. For some unaccountable reason, the request was repeated in October. All the data held on families receiving Child Benefit was posted from HMRC’s office in the north-east of England to the NAO office in London. The package, containing two discs, was not recorded or registered. It never arrived in London.
I swallowed hard and asked what, exactly, was on these discs? There was a silence. It was like pulling teeth. I was told again that it contained records of parents who received Child Benefit. How many? The answer: 25 million. What was worse, the information included the names and addresses of parents and children, Child Benefit reference numbers, National Insurance numbers – like gold dust to fraudsters – and worse, much worse, bank or building society details. It could scarcely have been more dreadful.
Perhaps because I had just been told about this, I reacted differently from those who worked with this data day in and day out. Here we were, talking in calm tones about the British government having lost intimate and sensitive details of half the population. It was all contained on two CDs which had been popped in the post? No one had a clue where it might end up? My response was terse, perhaps understandably so. Worse still, the discs had gone missing some three weeks earlier. Senior management had been informed two days ago, and I, who would have to answer for this, was only being told now. I flew back to London, but not before going into the garden for an hour. There was not a weed left standing.
By chance, on that Saturday morning Gordon rang me about something else. I told him of the latest blow. You’ll have to get the police in, he said. We both knew that that would reinforce the view that the government was not in control. I knew, of course, that the public would have to be informed. It was my job to tell them. This is the sort of announcement that cannot be made without first taking a deep breath and confirming the details. I had to be sure we were absolutely certain the information was lost. Also, the banks and building societies would have to be told what had happened. After all, they would have to protect their customers, especially after the information became public. This would take time. The police and the FSA were both anxious to avoid a premature public announcement. The banks wanted to flag accounts so that they could detect any fraudulent withdrawals, and the police did not want to advertise to the criminal world that this valuable information might be available.
Finally, I spoke to the Information Commissioner, who agreed with my view that we had to tell the public what had happened but that we needed to take enough time to ensure the banks had revised their security procedures and were ready to deal with potentially millions of enquiries. I instructed Paul Gray, chairman of HMRC, to order an immediate search of the Child Benefit office and of the NAO. In the days that followed, both buildings were scoured from top to bottom. The officials involved were questioned. On the Monday afternoon I was told they were almost certain they had found the missing discs. It proved to be a false hope. On the Wednesday we had no option but to call in the Metropolitan Police.
I was far from happy that I was being told all that was going on at HMRC. The senior management did not seem to me to grasp the seriousness of what had happened. More than that, I was told places had been searched which then turned out not to be the case. As part of the fallout I ordered an independent inquiry into what was going on within the organization. It revealed a management structure that was opaque, so that it was very difficult to see who was responsible for what.
I accepted the resignation of Paul Gray. I was sorry about that, as I had worked with him both in the Treasury and at the Department of Social Security, but he quite properly accepted responsibility for these serious failings at HMRC. The banks moved quickly to put in place security measures on all the accounts, while I got ready to tell the House of Commons what had happened.
The banks wanted time to complete their security work, and the police wanted to get as far as they could without alerting anyone who might have got hold of the discs. In a situation like this there is always a conflict between doing what is needed to protect the public and at the same time being open about what has happened. I decided to make a statement the following Monday.
Unfortunately, I first had to attend the meeting of the G20 group of finance ministers in South Africa. I had planned to combine what was my first of such meetings with a visit to see some of the development work they were doing in Ghana. This was to be a joint visit with Hank Paulson who, perhaps unusually for a US Treasury Secretary, had a huge interest in development in Africa.
But there was no question of that now. For the second time in two months, I had to show my face at a meeting I did not want to attend, this time 12,000 miles away. I had to go because it had been agreed that the UK would take on the presidency of the G20 in 2009. As it turned out, that proved to be a momentous decision. Not to have gone would have caused offence, and someone was bound to ask what had kept me in London. I flew down to Cape Town on the Friday night, arriving as a spectacular dawn broke over South Africa. I attended a meeting where we discussed the developing economic crisis, and my fellow finance ministers were consoling over Northern Rock. Little did they know that awaiting me at home was another calamity, this time affecting 25 million people.
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