The result was that 80 per cent of households who had lost out were fully compensated, with the remaining 20 per cent compensated by at least a half. In addition, 600,000 people on low incomes were taken out of tax altogether. It cost another £3.5 billion, being introduced halfway through the financial year. But by this time, because the economy was slowing, I judged it would be no bad thing to give people more spending power. It was just that the political consequences were awful. Not only was it a mess – and perhaps I should have faced up to the inevitable in the Budget – but it also created a profound dilemma: here was a Labour government taking money away from the lowest paid, the very people we were supposed to be protecting. It contributed, along with everything else that was going wrong, to a very bad by-election defeat at Crewe in June 2008, when the Tories gained their first by-election victory for almost thirty years.
In the meantime, the economy was slowing down both here in the UK and in just about every other part of world. The first quarter of 2008 was as bad as I had feared it would be. After the Budget, it was almost a welcome relief to fly to Washington for the annual meetings of the IMF and the G7. The G7 is the group of what used to be the seven largest economies in the world: the United States, Japan, Germany, France, Italy, Canada and ourselves. Russia attends for part of the meeting only. I used to feel sorry for Alexei Kudrin, my Russian counterpart, who was more easy-going than most of his fellow ministers. He had to sit outside the room while we discussed matters thought not fit for Russian ears. Self-evidently, the G7 is an anachronism. China is not there, and China is the second biggest economy in the world. The G7 is representative of the post-1945 order and its legitimacy is questionable. I think that is one of the reasons why the G20, a bigger and more representative group, worked so much better later that year, and again in 2009, in dealing with what by that time was a full-blown international crisis.
The small size of the G7 group does mean that it is possible to have proper conversations with fellow finance ministers. Most finance ministers and central bank governors speak English, so the conversation is free-flowing. Having attended countless international meetings, to be able to conduct something approaching a normal conversation is a real boon. The G7 chair rotates among its members and there are four meetings a year, two in the home country of the chair and two in Washington. This year Japan held the chair and so we travelled to Tokyo in February 2008. The meeting was remarkable. Although everyone was concerned about the downturn, no one had any inkling of how bad it would become in the next six months. Hank Paulson was perhaps the most concerned about the difficulties the US banks were facing. But all of us thought that when the banks reported on their losses, things would calm down. As it turned out, that was far from the case.
The only other thing that sticks in my mind from that trip is the first experience I had of an earthquake, albeit a very small one. I was staying in the residence at the British embassy, next to the Imperial Palace, home to Japanese emperors. Remarkably, these were among the few buildings to have survived the American bombing of Tokyo at the end of the Second World War. As I went to bed, I was shown a helmet and torch under the bed to be used in case of an earthquake. I thought no more of it. Lying in bed early next morning, drinking a cup of tea, suddenly the bed and the room began to move. It was disorientating and a bit frightening. It lasted only a few seconds, but the ambassador did say to me that it was believed it was only a matter of time before Japan would be hit by a large earthquake.
When the G7 met in Washington two months later the mood had changed, although there was still no sense of impending catastrophe. The G7 meetings in April are always held in the old Cash Room of the US Treasury. In its austere cavernous hall, we talked through our worries about the state of our banks, before the customary evening dinner. The ever-affable Hank Paulson had arranged that the guests for the meal should include a number of US and European bankers. By the time we met a year later, very few of them had survived. Bankers the world over are pretty contemptuous of politicians; American bankers especially don’t like governments. Yet, during the course of the evening, banker after banker told me that there was a looming problem and that they would be looking to the government to resolve it. In short, it was a one-way deal: when times are good, get off our backs; when they are bad, you have to help us.
The following day, the IMF held its annual meeting at its offices in downtown Washington, next door to the World Bank. At least in the G7 there is always the possibility of getting something done, because it’s such a small gathering. The IMF meeting in full session is a sight for despairing eyes. Hundreds of people attend, mostly officials from member states. Not every country is there; many are grouped into constituencies and appoint one of their number to appear on their behalf. But the table around which we sat was so large that it was difficult to make out who was at the far end. The exchanges at these meetings are very formal and formulaic. As ever, the real work is done behind the scenes. Much of the credit for what the IMF did during the crisis and in its aftermath goes to its managing director, Dominique Strauss-Kahn, who was appointed in late 2007. He had the authority of having been a French finance minister and he knew an extraordinary number of people around the world. Crucially, he recognized that the IMF had to come up with realistic programmes for help and reconstruction, as some smaller countries struggled to get through the crisis. Looking back at those two days, there was a great sense of marking time, waiting to see what would turn up. There was no sense of urgency. That was not to come until the next set of meetings, six months later.
From Washington, I flew to Beijing to attend an annual meeting between China and the UK, mainly to discuss trade. Like many people, I love displacement activity. When things are hard or difficult, there is nothing like a few hours off, where the phones don’t ring, when you have time to think, when you can be blissful in your ignorance of what’s going on back home. I enjoy flying and this flight took me over the North Pole. Looking down on the top of the world was an incredible experience, especially as I had managed to find Pink Floyd’s Dark Side of the Moon on the aircraft’s decrepit sound system.
This was my second visit to China. The Chinese are very formal, but ministers tend to speak more freely on a second or third meeting. I had a meeting in Beijing’s Forbidden City with the Chinese vice president responsible for financial affairs and noted that he asked very pertinent questions about the state of the West’s banks – not, I thought, without some degree of satisfaction. He was particularly interested in Northern Rock. It brought home to me the global reach of that bank’s collapse. Here we were, sitting in the Forbidden City, discussing the misfortunes of a small bank which until recently few people outside of Newcastle had heard of. He was justifying China’s caution on trade. I said that in the short term things were very difficult, but I was worried about the medium-term prospects too. He replied that he was also concerned about the medium term: the next hundred years, he said, could be very difficult. I wondered how many general elections there would be at home between now and then.
Catherine MacLeod, my special adviser, was with me on the trip, along with a couple of Treasury officials. After two days in Beijing we travelled to Chongqing. I wanted to see something of rural China, although the city itself has a population of somewhere close to 5 million. I also took the opportunity to promote the cause of Standard Chartered Bank, which was launching a new service for businesses there. After I had spoken to a group of assorted business people and officials, Catherine pointed out that there did not appear to be a grey hair in the audience. Rachel Lomax, a Deputy Governor of the Bank of England, joined us and made the same observation, before a charming Chinese guest sidled up to me: did I, he wondered, dye my eyebrows?
While I was away on the other side of the world, I was in constant touch with the Treasury and with Gordon. We had, up until my departure, been working closely with Mervyn and his colleagues at the Bank of England to address the problem that banks were having in obtaining enough funds to keep
going. The result was the implementation of the ‘special liquidity scheme’. This allowed banks to lodge securities with the Bank of England, for a fee, and receive cash in return. The Bank always lent less to the banks than the value of the securities they lodged with it, meaning that there would be no risk in the event of default by a particular bank. It was an extraordinary moment: before my departure I had approved a four-line letter sent by my Principal Private Secretary, Dan Rosenfield, to his opposite number in the Bank, effectively conferring a government guarantee of Bank lending up to £186 billion. I reflected that, unlike many of my international counterparts, I had the authority to do so, even if the Bank of England was reluctant, without having first to seek parliamentary authority. I did, of course, report on it to the Commons.
I had worked on this for several months and put a great deal of effort into persuading the Bank to agree to it – technical though it may be, it was one of the most successful things we did. Had we had it in place during the autumn of 2007, it would have been of huge benefit to the banks. It was a very good scheme and I was proud of it. That it was announced when I was on the other side of the world was a bit odd.
What the special liquidity scheme could not do, however, was to address the underlying problem, which was that too many banks were sitting on assets that were fast becoming worthless. In other words, it was the problems caused by the lack of capital that needed to be addressed. Unfortunately, strains between the Treasury and the Bank threatened to rupture our working relationship.
There are in the Chancellor’s calendar three annual fixtures: the pre-Budget report; the Budget; and then, usually in June, the annual speech at the Lord Mayor of London’s banquet at the Mansion House in the City of London. This black-tie dinner is held in the splendour of the banqueting hall, with lots of flummery. The Chancellor and the Governor of the Bank of England, who also speaks, process to their places to the accompaniment of a ritual slow handclap from the hundreds of guests. It is offputting until you realize they are actually welcoming you. The audience is largely drawn from the City. Bank chief executives are rarely seen, but their chairmen and board members and other City grandees are in attendance. This is not a natural Labour audience, but it was a good platform for me to set out plans for reforms to the Bank of England, including the novel proposition that in future the posts of Governor and Deputy Governors should be advertised. I wanted also to confirm our commitment to the London Crossrail link, which is important for the future of the City of London, linking it to Heathrow airport. And I was anxious to emphasize that Mervyn King and I were working closely together, whatever our differences.
In the days preceding the speech there had been a lot of discussion about who should fill the vacancy left by the retirement of Rachel Lomax. She had been Permanent Secretary at both the Department of Social Security and the Department of Transport during the periods when I was Secretary of State. We had worked well together, and I was sorry when she decided to leave. Her fellow Deputy Governor, Sir John Gieve, was also standing down. At his request, however, this was not to be made public for a few days. I had given John, whom I knew and liked from my days as Chief Secretary, my word about that.
Mervyn and I were to deliver our speeches before the main course was served, in order to allow for coverage on the 10 o’clock television news. After I had spoken, and as Mervyn was addressing the room, I became aware of a commotion at one of the tables across the room. I watched, transfixed, as a man began crawling towards us, weaving under tables and around people’s legs. Further down the main table, there was another commotion going on around John Gieve. The man on his hands and knees was a Daily Telegraph journalist. He had reached his target and was tugging at Catherine MacLeod’s long skirt from under the table. John’s departure had been leaked, and they wanted a reaction from me. I was livid. Very few people had known, and it was unforgivable in its hurtfulness to John. In the middle of the dinner I had to take him behind a screen at the back of the main table and apologize, but the damage was done.
I cannot pretend to understand the motive behind the leak. It certainly ensured that the message of my speech, and that of the Governor, was lost. The evening had reflected badly on the government, where most of the mud tends to stick. As we left the dinner, Mervyn was seething and told me in no uncertain terms that he blamed No. 10. Looking over his shoulder, I could see a BBC television crew advancing, happily unaware of what the Governor was saying to me. I kept trying to hush him, to no avail, but managed to escape into an adjoining private room where I found Rachel Lomax. We shared a drink and mulled over the sometimes dysfunctional operation of government and Bank alike.
As the 2008 summer recess approached, it seemed to me that any hope had faded away that the economic downturn of the past year might have been temporary. No matter who I spoke to – economists, business leaders, commentators – everyone felt that the economy was heading in the wrong direction. And the political outlook was just as bad. We were about to lose one of the party’s safest seats in Glasgow East.
I did some telephone canvassing. Long experience has taught me that when you ask someone if they will support you and they reply along the lines of ‘I haven’t made my mind up yet’ or ‘I’m just having my tea’, it means they are going to vote for someone else, or not at all. That is precisely what I was hearing in call after call. It was so bad that voters were reluctant even to tell me what they did not like about us. The loss of the seat to the SNP was a severe blow to Gordon’s authority and sapped his morale further. There was now open talk of a challenge to his leadership, although there was no specific candidate around whom people were gathering. There was a measure of desperation, but no one ready to throw their hat into the ring. It was the worst possible type of revolt, a lot of damaging talk but no action. I still believed we could recover and I did not see that a leadership battle would help. I was accordingly careful about what I said. I did not want there to be any suggestion that there were differences between the two of us, although our working relationship was to come under severe strain by the end of the summer. In my view, we were constantly behind events, mopping up as we were dragged along. I felt that we needed to prepare people, to tell them that the next few months, and probably the next few years, were going to be very difficult. We would lose all credibility if we didn’t.
I convened a meeting with my ministerial colleagues and the Treasury’s top officials to discuss the general outlook and prepare for the autumn. We met, far from the madding crowd, at Dorneywood. Set in idyllic gardens, and under the Heathrow flight path, Dorneywood is the former country home of Lord Courtauld-Thomson, a businessman and philanthropist, who gifted it to the nation in 1943 for use by the prime minister or senior Cabinet ministers. Born in Edinburgh, Lord Courtauld-Thomson was the son of Robert Thomson, the man who reputedly invented the pneumatic tyre. Churchill was entertained at Dorneywood, where he played bagatelle with his host. The board on which they played is still there, along with an oil painting by Churchill and a note from his wife, Clementine, passing on his instruction that his name be entered in the Golden Book where the highest bagatelle scores were recorded. He needed to win, even at games.
Although Gordon was given the use of Dorneywood when he was Chancellor, I don’t think he ever visited it. Instead, John Prescott was a regular visitor throughout his ten years as Deputy Prime Minister. When Gordon became Prime Minister he allocated Dorneywood to me, although in the nine months since becoming Chancellor we had visited perhaps four times – not because we didn’t want to go more often, but there had simply not been time. The Dorneywood Trust, a bequest from the founder, pays for the upkeep of the property and the Chancellor or other minister is billed for food and drink and other costs, so there is no expense to the taxpayer. When we first visited, the red-brick Queen Anne-style house was dreary and forbidding and sadly run-down. It was a place lost in time, set up for country-house weekends, with a butler and a cook and under-cook, and no guests. It seemed to exist to service itself
. It would have been no surprise to find Charles Dickens’s Miss Havisham at the dinner table.
Shortly after becoming Chancellor I had held a Treasury summit at Dorneywood, so that ministers and officials could engage more informally and openly. We arrived and got out of the car to be greeted, if not welcomed, by the man in charge. There was precious little grace and even less favour. A sodden pile of bags and briefcases was being rained on outside the front door. No bags, I was told, were to be left in the hall because of the danger of damage to a mural by Rex Whistler – which might have been fair enough, but there were twenty other rooms in which the bags could have been stacked. The sorry heap was eventually taken in and left to steam in the outer hall, while Whistler’s bucolic mural remained safe.
By July 2008, however, the old regime had moved on and the house had been dusted down, the bomb-curtains binned, and three cheerfully enthusiastic members of staff recruited. Dorneywood was a retreat from the frenetic pace of the Treasury where we could pause and reflect and consider where we were going. Late in arriving, I hurried in to start the meeting. To my horror, I saw assorted Treasury officials and ministers enjoying an evening drink on the lawn. There was nothing wrong with that, but this was no ordinary lawn. It was the notorious spot where John Prescott had been photographed playing croquet in the middle of a weekday afternoon. He had been there with his officials, as was I, to discuss his department’s policy. They had taken a break, unfortunately oblivious to a photographer concealed in a hedge. On our first visit to Dorneywood, Calum and I took a wander around the estate and found the spot where the photographer had hidden. It was a clever place to have chosen, but not one that he could have chanced upon. I suspect someone must have told him where and when to be there. The story was grossly unfair on John: he worked tirelessly throughout his political career. When we first met in the mid-1980s I think he probably regarded me as another one of those middle-class boys who were taking over his party. But, contrary to the impression he sometimes gives, John is a modernizer. Above all, through his own experiences as a seaman, he knows how government can make a difference to people’s life chances. And throughout his ten years as deputy leader he worked ceaselessly to bridge the growing gulf between Tony and Gordon. John and I came to respect and like each other.
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