Back from the Brink

by Alistair Darling

  This was not a time for announcing new spending initiatives. However, a Budget is also a political event. It is the big occasion when the Chancellor can set out a political direction, something Gordon had done to good effect for most of the ten years he held the post. In the years since 2008, a myth has been perpetuated that the economy was bust before the financial crisis, and not because of it. In fact, in 2007, the year before the crash, our economy grew by 3 per cent, which was the fastest growth of any major economy. Borrowing averaged 3.4 per cent of national income between 1979 and 1997. Between 1997 and 2007 it averaged just 1.2 per cent. Debt, which was 43.3 per cent of national income in 1997, had fallen to 36.6 per cent ten years later. In addition to this, unemployment was at a lower level than in Germany, France or Italy. So the picture was far better than the Conservative and Liberal Democrat doomsayers claimed after the general election of 2010. The problem was that it had been assumed that tax receipts would continue to flow in from the financial sector.

  Looking at the preparations for my first Budget in 2008, borrowing was £1.4 billion lower than I had forecast in the pre-Budget report the previous October. The structural deficit was small by international standards, at 2.3 per cent of growth, 0.4 per cent of current spending. The basis on which I made my Budget forecasts was therefore not at all unreasonable. Moreover, I told the House of Commons in my Budget speech that our economy would continue to grow, a view supported by the Bank of England, the IMF and the Organisation for Economic Co-operation and Development (OECD). What this shows, of course, is that at the time no one realized just how far economic conditions would decline during the course of that year – me included. It was only following the collapse of the American bank Bear Stearns, immediately after the Budget, that the economic outlook darkened significantly.

  So the background to this Budget was that we had a strong economy. It was the only major economy not to have seen any break in growth in the previous decade. There was still a lot of uncertainty, however, and I expected growth to be lower than forecast in the pre-Budget report of the year before.

  Most people pay scant attention to growth forecasts in the good times. In a downturn, they are scrutinized not only because they give some clue as to what the Treasury thinks will happen; they also determine the assumptions the government makes about how much money it will get in through taxes. The gap between what the government gets in and what it spends determines how much it will need to borrow, and what that will mean for the country’s overall level of debt. Especially at a time when trust in politicians is in short supply, the growth forecast must be credible. That said, forecasting is a best estimate, not an exact science; rather like forecasting the weather, it will probably be only approximately right but almost certainly precisely wrong. The Bank of England publishes its forecasts in the shape of a fan with a range of possibilities. That way, the forecast is almost certainly going to be right over some part of the range. The Bank leaves itself the kind of room for manoeuvre that the government does not have.

  Trying to calculate what is ‘structural’ in the deficit and what is temporary can take years to work out. This is because the independent Office for National Statistics continually revises its figures as more information becomes available. Its judgement about what actually happened in the economy over a particular period is subject to change. For example, when Britain came out of the recession at the end of 2009, the first estimate by the ONS showed very modest growth, of 0.1 per cent. By 2011, two years and a general election later, the ONS had revised the figure upwards to 0.5 per cent – not massive, but very significant in economic and political terms.

  Because the growth figures decide how much can be spent on things like schools and hospitals, it really does matter what judgement you reach, and it has to be based on your best guess as to what is happening in the economy. Put simply, if you are too cautious you can crash the economy by taking too much out in the way of taxes or spending cuts. Travel too far in the other direction and you will end up with increased borrowing, which in turn translates into higher levels of debt, all of which has to be paid for.

  The forecast figures were to be a point of contention between myself and Gordon at every Budget and pre-Budget report until the end of 2009. He thought I was being far too pessimistic. Certainly during 2008, he was far more optimistic that we were about to see a recovery. In fact, throughout my time as Chancellor, Gordon felt that the Treasury was too pessimistic and was stymying our ability to manoeuvre. The Treasury is financially conservative, that’s their job, but it’s important to remember that Gordon had been Chancellor during ten years of fair weather – although, even during the good times he felt they were too conservative.

  It is true that, left to its own devices, the Treasury will always err on the side of pessimism and caution. It is equally true that you cannot publish forecasts that fit with a story you want to tell, taking account of policies yet to be introduced. My judgement was that it was better to be cautious and to be able to announce that things had improved at a later Budget, rather than announce something that was clearly far too optimistic, only to have to downgrade the forecast at a later date.

  You can’t wash your hands of the need to make a judgement. I supported the setting up in 2010 by the new government of the new Office for Budget Responsibility (OBR), which is independent of the Chancellor of the day. I had considered such a move in the autumn of 2008, when it was clear that our economic forecasts were going to be very wrong, mainly because of the banking crisis. I was looking for ways to get some independent credibility into our forecasting. But as if to demonstrate how difficult forecasting is, the new OBR had to downgrade its own growth forecasts twice during its first ten months of operation. The Bank of England too has had to downgrade its forecasts for 2012. So too have the IMF and the OECD. This does not mean that they got it wrong, just that forecasting is a difficult task, especially at times of economic stress.

  That said, my own forecasts for 2008 turned out to be too optimistic. During the late spring and summer of that year, I became more worried about our prospects. All the indicators were that the economy was slowing down fast. Every economist I spoke to outside the Treasury painted a gloomy picture. However, my view was not shared by Gordon. It was at this stage that it became increasingly apparent to me that he did not trust my judgement. He thought that I had become the prisoner of the doom merchants within the Treasury. I would gladly have listened to a more optimistic assessment, but I couldn’t find one.

  Gordon continually depended on the advice of those he had worked with for the past fifteen years, particularly Ed Balls. Ed had gone to work for Gordon when he was Shadow Chancellor. Ironically, I persuaded Ed not to leave Gordon very early on, when they hadn’t been together long, and there had been a huge row over something now long forgotten. As we walked along Millbank, I encouraged him to stay on. He is a powerful intellectual force, though not always easy to work with. Gordon came to depend upon him for fiscal advice, and then increasingly for all things political. From 2006, Ed was in charge of the planning committee for the handover to Gordon, in the run-up to Tony’s departure.

  I had no problems with Ed until I became Chancellor; before that he was never hostile and usually very helpful. I know that he wanted to be Chancellor, but in the end Gordon made the call and picked me and that must have been difficult for Ed. He was hugely influential in developing our modern economic policy. At one point I was asked whether I would accept Ed as Chief Secretary to the Treasury while Gordon would retain him as a sort of chief of staff. I refused. That was clearly unworkable and it was obvious that Gordon would try to make him de facto Chancellor. Our relationship over the three years I was Chancellor was strained. Notes leaked to the Daily Telegraph in 2011 have shown me on a list, apparently prepared by Ed, of people who needed ‘handling’. This suggests that, wherever I was slated for in 2006 as Gordon and Ed prepared for Gordon’s premiership, it wasn’t No. 11.

  I did not mind competing views; in fact, I
would have welcomed the opportunity to discuss matters. It would have been much better if we could have all sat down in the same room and discussed our differences. Life in government would have been less frenetic and more productive. But the opportunity rarely arose; Gordon would have one conversation with me, and then presumably another with Ed and his other key advisers. Another huge problem was that the people from whom Gordon was taking advice didn’t have access to the data the Treasury had – once you’re out of a department you lose the institutional knowledge within months – and Gordon himself didn’t have details from the Treasury. The main point is that Gordon and I were reading the situation differently. He didn’t agree that things were as bad as they seemed.

  Increasingly, I found myself in what appeared to be a negotiation with people who were not in the room. The views of other Cabinet members were never sought, which was a mistake. Again, this was a legacy from our years in opposition and the process by which by 1997 our economic thinking had developed into a coherent and compelling policy. Prior to Gordon becoming Shadow Chancellor, economic policy had been developed by committee – hence the unaffordable spending pledges made during the 1992 election campaign, which compelled John Smith to make a manifesto commitment to increase National Insurance. Once in government, both Tony Blair and Gordon Brown were reluctant to consult with – or, indeed, to trust – their colleagues on key issues. Iraq, identity cards, tuition fees, the economy – all would have benefited from proper collective discussion. The Chancellor has to be responsible for economic affairs and the preparation of the Budget, but throughout 2008 and 2009 it would have been beneficial to have canvassed the opinions of Cabinet colleagues, at least as to general strategy. As it was, discussions about the Budget, its forecasts and its measures, were largely conducted between the two of us, with the decisions delayed while Gordon consulted elsewhere. It was often frustrating, sometimes infuriating.

  Preparing the 2008 Budget became increasingly fraught. Rather than sitting down two months beforehand and deciding on the strategy we would follow, the whole thing was up in the air until days before it was delivered. This was the pattern we would return to over preparation for the following year’s Budget, when the issues were by then much more acute and the tension between us strained to breaking point. In 2008 I decided I needed to raise more money. I did this by increasing alcohol and ‘green’ taxes. This enabled us to increase Child Benefit to £20 a week, a year earlier than planned, and also to increase the Child Tax Credit for families on low and middle incomes. That was to help the following year when recession began to bite. My view was that our economy and tax revenues had been propelled by a cheap and plentiful flow of credit, which was now drying up. To what extent this would hit the economy was not yet clear. I was in no doubt that the effect would be significant. I did not want to exacerbate the situation by taking action that might overcompensate.

  At the time, we believed that the downturn might be short-lived. It was not until the summer of 2008 that I began to believe that the situation was far worse than even the most pessimistic commentators had thought earlier in the year. I wanted a low-key Budget, built around the need to provide some stability. In any Budget there are countless details that must be right, endless meetings with officials, and, of course, ministerial colleagues who want more money and, when they are rebuffed by the Chancellor, make the short trip next door to the Prime Minister. Spending money is always much easier than saving it.

  The Budget was earlier than usual, on 12 March 2008, because Easter was early that year. The Budget is followed by a debate in the House of Commons, and sufficient parliamentary time has to be allowed between the Budget statement and the Easter recess. Had it been slightly later, it would have followed rather than preceded the collapse of Bear Stearns in the US on 14 March, which was to have a profound effect on confidence all over the world. Although not quite as bad as the pre-Budget report of October 2007, this Budget did not feel right to me. Again, it had been cobbled together in too much of a hurry, and it was badly received in the House of Commons. Looking back now, too much of it was a repetition of what had been announced before.

  Budget Day in Britain has its own peculiar rituals. In the days leading up to it, the speech, which is about an hour long, has to be prepared. It takes longer to write than people might imagine. Every word matters, and every word has to be pored over. It is watched by millions, with a surprisingly large audience overseas. This time, because of the tense negotiations with No. 10, it was only finished the evening before it was delivered, and I was still working on it when it was time to attend another important tradition in the Budget timetable, my audience with Her Majesty the Queen.

  This audience, which lasts about an hour, takes place in Buckingham Palace. Only the Queen and the Chancellor are present in her private sitting room. The Chancellor is there to present the Budget, but in practice the conversation ranges far wider. I remember reflecting on the fact that the Queen has seen out eighteen Chancellors since she ascended the throne in 1952. Her first was R. A. B. ‘Rab’ Butler. I wondered how many times she had listened to her Chancellor setting out how he proposed to recover from a difficult set of circumstances. Conversations with the Queen remain confidential. However, I have always been struck by how remarkably well informed she is on every subject that could conceivably be discussed. If only every minister were as diligent in dealing with their red boxes. Taking my leave, I walked out of the sitting-room door to be met by a long line of corgis waiting in the corridor for their evening audience.

  Back at Downing Street, we worked on until midnight, when I went to bed. I left my special adviser, Catherine MacLeod, hunched over the computer in the back bedroom, still working on the Budget broadcast which was due to be filmed some five hours later. This ten-minute presentation by the Chancellor is broadcast on all channels on Budget Day. If it goes well, very few will notice it. One mistake and everyone will know about it. It has to be recorded early in the morning because there is no time to do it later in the day. I got up at 5 a.m. to read over the broadcast speech. It could not fairly be called a rehearsal. I was still marking it up as I went downstairs in the lift to record it in the No. 11 study. The unfortunate television crew knew what to expect, being more experienced at Budget preparations than I was, when they turned up at No. 11 at the crack of dawn. Because they then know what is to be in the Budget, they have to be locked in the sitting room in No. 11 until after it has been delivered in the House that afternoon. They came armed with books and iPods and packets of sandwiches and, in one case, a pair of slippers.

  After filming the obligatory television pictures for the lunchtime news, we had the traditional Cabinet meeting which is the first occasion on which colleagues would hear my assessment of the state of the economy, prospects for growth, and the Budget measures. The formality was somewhat undone by a visit from Sybil, our cat, who sauntered in and settled herself under the Cabinet table as I was about to speak. My colleagues listened politely for what would affect their departments, although in reality there had been discussions with them beforehand to prepare the ground. As we left the Cabinet Room, most wished me well, in the jolly, keep-up-your-spirits manner that I imagine people might adopt before someone is trundled off for life-or-death surgery.

  I went back next door to No. 11 to prepare for the departure from behind the famous front door. Tradition dictates that the Chancellor should emerge holding up the red box in which ministers receive their homework papers at the end of the day. Gordon had, when he was Chancellor, used a box made by apprentices in his constituency. To me, that was his box. I opted to return to the old battered box first made for and used by Gladstone in the nineteenth century. It’s shabby and the key has long been lost, but it is part of our history. It was disinterred from the old Cabinet War Rooms where it had been stored, along with a pair of white gloves with which it is supposed to be handled, but which I decided to forego.

  It was only when an attendant opened the door and I walked out at prec
isely the appointed time to face the world’s media that the reality kicked in. I suddenly thought, here I am on the way to present my first Budget – me, in a scene I had witnessed down the years since my childhood. Those few moments on the doorstep holding up the Budget box for the cameras felt interminable. The occasion felt all the more poignant because my mother had come down to watch me present the Budget. As we stood in the hall behind the door, she said: ‘Your father would have loved to see this.’ So he would.

  Perhaps the most daunting part of it all was presenting the Budget in an hour-long speech to a packed House of Commons. I had spoken in the House on countless occasions and had never had a particularly bad time in the chamber. But I wasn’t happy with the speech, and as I addressed the House I knew it could have been better, both in content and style. At one point, during a particularly tedious passage on the environment, I looked up at the visitors’ gallery and saw Margaret with Calum and my mother, who appeared to be sleeping.

  Returning to the Treasury, I did the traditional round of calls to newspaper and political editors. It is important to try to explain to them what you are attempting to do. I was in no doubt that they would focus on one thing: the growth figures. So it proved.

  There was a sort of parallel universe in No. 11, an antidote to the world of bankers, big business and international grandees. Margaret does not stand on formality. When we moved in, she said she wanted to open the doors to people who might never think of visiting Downing Street. She was notoriously keen on scooping up groups of children visiting the street to have their photo taken and offering them impromptu tours. Once the No. 10 security staff had stopped being taken aback they were happily supportive. The grand No. 11 State Room, up a dingy staircase lined with drawings and cartoons of previous Chancellors, became the stately province of small charities, voluntary and community groups invited to hold receptions. They would find a sponsor to pay for refreshments, then invite their own guests, to raise their profile or celebrate their work.