Back from the Brink

by Alistair Darling

  When the first figures were revealed at the end of January 2010, it was thought that the British economy had just struggled over the line with growth of 0.1 per cent. It was just enough to see the end of the recession. It wasn’t until more than a year later, in 2011, that the ONS finally confirmed that the figure was 0.5 per cent – small, but much better. It vindicated everything we had done to get us through the recession.

  In 2009, though, the prospects still looked very uncertain. The political landscape had not changed. We still trailed the Tories, flat-lining in the polls well below 30 per cent. I wasn’t involved in the day-to-day general election planning; but, in a welcome development Gordon, at the insistence of Harriet Harman, had set up an inner group of senior Cabinet members to contribute to the election strategy. Harriet, over many years, has devoted herself to the Labour Party. Her enthusiasm is remarkable. Like Jack Straw, she had served on the long march of eighteen years in opposition, and was determined that we should put up a realistic fight.

  Douglas Alexander, who was the general election coordinator, Ed Miliband and Ed Balls were there, as were David Miliband and Alan Johnson. Alan’s grounded approach and feel for the ordinary person were invaluable. Peter, as often as not, presided in Gordon’s absence. I noticed that he took copious notes. This was the first time that such a group had been set up, and serious thought was finally being given to how we might recover so much lost ground. There was much talk about how to win back a whole generation of people who had voted for us in 1997 but who felt we had nothing to say to them now. This group was represented to a large extent by the 10p tax rate losers.

  David Miliband said that attacking the Tories was all very well, but we also had to set out our own vision. What struck me then was that unless we did something radical at the pre-Budget report we would never break through. At one meeting, I said that we had to ask ourselves why people were not listening to us any more. I said: ‘We have to make the weather. We have to make ourselves the story. We have to take risks. We have nothing more to lose.’

  Most of my colleagues agreed, although Gordon and Ed Balls wanted the focus to be on the threat of what the Tories would do if they got in. Slowly but surely, the argument came back to the need to go for growth, not cuts. It was, though, a useful first stab at a return to collective discussion in a small group. I started engaging Gordon on the pre-Budget report at the end of October, when I sent him a long note going through the main arguments. The forecasts would show a deeper recession than anyone had expected at the beginning of 2009, which meant that growth for the year would be lower than we had thought. But I told him that we still expected growth to recover at the end of 2009. I also expected borrowing to be higher than forecast. The big question was what to do about public spending. The measures announced in the pre-Budget report of 2008 and the Budget of 2009 included plans for a reduction in borrowing of £56 billion, a quarter of which would come from increased tax – mainly from the 50p top rate and from reform of pension contribution relief. The other three quarters would come from spending cuts.

  I did stress to Gordon that the implication of our spending plans – which were to protect the health service and schools by giving them an inflation-only increase, to maintain police officer numbers, and to maintain our commitment to overseas development – amounted to protecting 60 per cent of everything we spent in government departments. It did mean that other government departments might see cuts of around 15 per cent; the exact figure would depend on what we decided at the end of the day. I went on to say that while we would not carry out a spending review, we had to identify some of the areas where we would stop or postpone spending, or otherwise reduce costs. Finally, I outlined a number of measures to boost growth. As on previous occasions, our first meetings were inconclusive. However, it was apparent that Gordon believed that I was taking the wrong approach.

  The government had been preparing papers setting out where we wanted to go on education, health and law and order, as well as measures to get people back to work. Logically, these should have followed the pre-Budget report, which would have set the spending parameters. Instead, Gordon sent me a note saying that we should publish the spending papers first. I remember saying to him: ‘When you were Chancellor you would never have agreed to such a proposal.’ Fortunately, he took it no further, although it illustrated the continuing gulf between us.

  There was also a difference between us on the vexed question of efficiency savings. Every government, in every part of the world, knows it can do things more efficiently. Efficiency savings also have the superficial attraction of being apparently pain-free. This is not true in most cases: the biggest costs are labour costs, so there are implications for jobs or wages. But, of course, improved technology can make government more efficient and less costly, although this is not entirely straightforward and neither can it be done quickly. I was happy to embrace efficiency savings wherever they could be found. But what was also needed was some evidence of other ways in which we were going to spend less.

  There was one further prelude to this year’s negotiations. In the early autumn Gordon told me he accepted that we had to show we were mindful of the deficit. He therefore proposed a Fiscal Responsibility Act which would commit us to reducing the deficit by half over a five-year period. In my opinion, such a move was wide open to the argument that you didn’t need a law to ensure that you act as you should. In the circumstances, though, I seized on it because it did at least provide me with the equivalent of a fiscal rule, providing a ceiling on what we could borrow and spend. The Act was eventually introduced in early 2010, to almost universal derision. Legislation is no substitute for sound judgement.

  This time, officials on both sides of the divide made strenuous efforts towards a more satisfactory process of working through the pre-Budget details. It was arranged that we would have a series of breakfasts which, because of the attraction of food, did at least mean we would all be there at the appointed time in the small dining room at No. 10. We did not meet every day, but Gordon, Peter and I met often, essentially to discuss the same fundamental issues that had dogged our relations for the past year. As we approached the day itself, there were more fraught meetings downstairs in Gordon’s study. Ed Balls occasionally attended, and was most preoccupied with spending on education. This posed a problem because Ed was in charge of a big spending department. For some of my colleagues, like Jack Straw at Justice, who voluntarily agreed to make some painful cuts in his departmental spending, this seemed unfair: Jack was prepared to do his bit, but expected others to do the same.

  The process, then, was much better than in previous years. The outcome, however, was no different. There were long and protracted discussions about the Budget forecasts, both on growth and on borrowing. There was no disputing that the growth figures for 2009 would be bad, and I wanted to hold the growth forecasts for 2010 at more or less the same place, 1.25 per cent. The figures for the years following were more optimistic, but just about within the range of what the Bank of England was forecasting. With the borrowing figures we erred on the side of caution. Two years later, when the ONS gave their latest revision of those figures, it was clear that we had actually borrowed £21 billion less. The reason was that we had stimulated the economy, tax revenues were higher and we had to spend less on the cost of unemployment. The figure was still high, but it again demonstrates that our support for the economy resulted in less borrowing being necessary.

  I returned for the final time to the question of VAT. I had discussed what I wanted to do with Peter in the hope of getting his support. Without it, I knew I would be outnumbered again. I had said to him that the only chance we had of extracting ourselves from the mire was to do something that would surprise our critics. I wanted to maintain the stimulus throughout the financial year and I would announce that we were protecting budgets in three key areas: the health service, schools and police. I could only do that if we accepted the need for cuts elsewhere, announcing specific symbolic cuts in order
to show that we were serious about making long-term reductions in borrowing.

  If I could increase gradually the rate of VAT to 19 or even 20 per cent, I could scrap the National Insurance increase. I could compensate low-earners with a package of measures to negate the impact of the VAT increase. On top of that, I could surprise people by cutting both the basic rate of income tax and corporation tax in order to boost growth. I tried this out with Gordon, but was met with an emphatic no. I talked to both Peter and Ed Balls, trying to convince them that we needed something big if we were to come out of this with any momentum at all. While Peter this time had an open mind, Gordon and Ed remained implacably opposed to the VAT increase. There was nothing more I could do, so we stuck with the tax measures previously announced.

  We then turned to discuss spending, something that was not resolved until a few hours before I presented the pre-Budget report. I had no difficulty in seeking to protect front-line services in key areas. But it was clear that Ed wanted more, fearing that he would go into the election campaign being outbid by the Tories. Andy Burnham, the Health Secretary, proved unwilling to accept protection for the NHS only. He was concerned about other areas of health spending as well. Only Alan Johnson, who was always thoughtfully accommodating, said that he would be happy to go into the election protecting police numbers. He recognized that cuts would have to be made somewhere and there was no point in pretending they wouldn’t.

  I also ran into fierce resistance from Yvette Cooper, now in charge of the biggest spending department of them all, at Work and Pensions. I wanted to delay some pension reforms because of the upfront cost. She didn’t. In the end we reached a compromise, but again only at the last minute. The wrangling on spending went to the wire. On the night before the pre-Budget report, I went to bed at 11 o’clock and told my office that no more changes could be made. Next morning, Dan Rosenfield told me that one of my colleagues had been demanding to speak to me at 1.30 a.m., trying to reopen the settlement. I’ll spare their blushes. That is no way to run anything.

  The coalition government now has to run all its proposals past the independent Office for Budget Responsibility. That means that the Budget has to be signed off some time in advance. That to me is a major attraction.

  There were in that pre-Budget report worthy measures announced to help industry and the environment. On the latter, Ed Miliband pressed hard, but recognized the constraints we were working under. We were able to take more children out of poverty and to announce a number of measures that would help people during the recession. It is worth remembering that unemployment had risen by far less than independent forecasters had expected. If we had seen the same rate of job losses relative to GDP as were seen in the early 1990s, four times as many people would have been out of work. We had, too, a guarantee to stop school-leavers going straight on to the dole. House repossessions were running at half the rate of the recession of the early 1990s, and the rate of business failures was likewise down by half against those years. And we had been able to help many families. The tax credit system may be complex, but nearly 400,000 families whose incomes fell because of the recession received on average £37 more per week as the system automatically topped up their wages.

  None of this helped us. The pre-Budget report simply lacked credibility. It was trashed in the press. Even if I had been wrong in my argument, any coherent argument is better than none. We simply didn’t have one.

  There was one tax, however, that did strike a chord and was to prove extremely popular with the public, but deeply unpopular with the people who had – amazingly, given the expenses scandal – managed to snatch the title of ‘most hated people in Britain’ from the politicians: the bankers. The subject of bank pay had been highly contentious since it emerged that the people who ran Northern Rock had been paid exorbitant sums without any apparent relationship to what they actually did. Throughout the entire banking crisis, huge bonuses continued to be paid. The banks’ defence was that everybody else paid out salaries and bonuses. If they didn’t, then they couldn’t attract the best people. Rather like premiership football players, if you want the best, you have to pay for it. The problem is that, rather like the premiership, it becomes apparent from time to time that very large sums are being paid for very little in the way of results. Even in the football industry there is a growing realization that clubs can’t carry on paying stratospheric wages without getting deeper into debt. This is not the case in the banking industry, where, as far as I can see, there is not even an acceptance that there needs to be a better relationship between performance and reward.

  A bonus should be just that: a payment for doing something particularly well. Instead, it has come to be paid as a matter of course. We need to get this into some degree of perspective. Most people who work for banks, the people you meet in your local branch, the backroom staff, are not paid over the odds; yet it is the bank staff in the high street who frequently had to endure the most abuse from angry customers. On top of that, many of my constituents employed by RBS and HBOS had given up pay rises and instead taken shares in the bank, which by 2008 were next to worthless. They had done the right thing, but were cleaned out. Some of them have every right to be very angry. As one of my constituents, an RBS middle manager, said to me: ‘We thought these people, Fred Goodwin and the like, knew what they were doing and that’s why they got paid so much.’ Bonuses are used to benchmark the relative standing of bank employees. It is about status. Just after I introduced a tax on bonuses in my pre-Budget report, I was accosted by a very senior bank executive. I knew him quite well and was rather taken aback at his anger. His bonus amounted to around £1 million. I asked him to look at this through the eyes of ordinary people. ‘What does your next-door neighbour say when you tell them you’ve got £1 million by way of a bonus?’ I asked.

  He told me, ‘He doesn’t mind.’

  ‘What does he do?’ I asked.

  ‘He’s a banker as well, and he earns more than me,’ was the reply.

  The actual amount really does not matter any more to these high-rollers. It is all about their relative status. In many conversations with bankers who were trying to rehabilitate themselves in the eyes of the public, I made the same point over and over again. Unless you start to show some restraint, some understanding, no one will listen to a word you say. If people continue to believe you are simply raising two fingers to them, you will get nowhere. I do understand the need to hire the very best staff. After all, I agreed to get the best people into RBS so that we could turn the bank around and get our money back.

  I did consider a windfall tax. But as some banks had been losing billions of pounds it would have looked like an empty gesture. On top of that, governments have to be very careful about changing the rules of the game. A windfall tax might have won a headline or two, but I was sure that the press would be only too happy to paint a lurid picture of banks moving overseas. Far better, I thought, to deal with the thing causing so much anger: bonuses.

  So I decided to announce, without warning – since this is an industry filled with experts at cunning tax avoidance schemes – a 50 per cent tax on all bonuses over £25,000. It eventually brought in over £3 billion. I said in my statement to the Commons that I would rather the banks practised restraint, but if they wouldn’t do so, bonuses would be taxed at 50 per cent. The outcry was predictable. The rightwing press that Gordon’s camp believed I was courting ran lurid stories of bankers planning to flee the country and decamp to Switzerland. I did not believe it. As one banker said: ‘Have you ever been to Geneva?’ And he was Swiss.

  Over the following days, I started to receive frantic calls from No. 10 officials who were clearly being lobbied by senior bankers, all of whom seemed to be speaking from the same script, urging me to reconsider. Crucially, the calls were not from Gordon. He was as adamant as I was that we would not give in on this. There was, though, in the runup to Christmas, a crescendo of complaints. The most voluble came from Jamie Dimon, chief executive of J P Morgan Cha
se. Like many American bankers, he comes from humble origins and has worked his way to the top. He speaks bluntly. He asked for a telephone call with me, which I took in the sitting room of the No. 10 flat. Normally I would regard any conversation with someone like Mr Dimon as confidential. However, since a fairly accurate account of it appeared in a newspaper a few days later, and it didn’t come from me, I think I am entitled to recount it.

  Mr Dimon was angry, very angry. He pointed out that his bank had not been the cause of this crisis. That was true, but, I said, in 2008 his bank, like every other bank, had depended heavily on both ourselves and the US government in order to stay in business. He said that his bank bought a lot of UK debt and he wondered if that was now such a good idea. I pointed out that they bought our debt because it was a good business deal for them. He went on to say that they were thinking of building a new office in London but they had to reconsider that now. I knew full well that they were considering consolidating their offices in London and I guessed correctly that to teach us a lesson they would postpone their decision until after the general election. That they did.

  Mr Dimon then went on to say that I was punishing the many Veterans he employed in his office doing fairly humdrum jobs. I said I doubted that. The Veterans were working in the US and were beyond the reach of UK taxes, although I did say I was pleasantly surprised that he paid humble employees such high salaries that they would be affected by the bonus tax aimed at top earners.