The End of the Party
Page 77
Both Prime Minister and Chancellor remained ‘very nervous about nationalisation’.9 They were fearful of the n-word because of its associations with the 1970s and for fear of the response from the right-wing press. Brown’s friend Paul Dacre, the editor of the Daily Mail, ran a leader in January declaring: ‘The dramatic step of nationalisation would be the day when Labour’s hard-won reputation for economic competence is finally lost.’10 Cabinet colleagues noted that Brown didn’t want people ‘saying it’s Old Labour going for nationalisation’.11
As a result, Alistair Darling ‘moved heaven and earth to try and find a buyer’.12 John Kingman, the Treasury’s Second Permanent Secretary, headed the effort to secure a private sector buyer who would take the sinking Rock off their hands. Tension between the Prime Minister and Chancellor increased as Brown constantly went round Darling and directly badgered Kingman for progress reports.13
The most flamboyant bidder was Sir Richard Branson, a man who could rarely see a spotlight without wanting to be at the centre of it. He presented himself as the Rock’s bearded saviour and won ‘preferred bidder’ status even though he did not have a banking licence and his operation, Virgin Money, was small in comparison with the bank he sought to acquire. The Government’s negotiating position was compromised by the knowledge in the markets that ministers were frantic to avoid public ownership. ‘That was obvious to potential bidders, which gave them an incentive to play endless negotiating games,’ says one senior Treasury official.14 Pressing on Brown and Darling from another direction was the political imperative to be able to present a deal as reasonable for the taxpayer. Howls of outrage greeted the Chancellor when he presented MPs with a scheme to use government bonds to pay off the bank’s debts. Vince Cable of the Lib Dems led the criticism that this had the potential to leave any profits with a new owner while saddling the taxpayer with all the risk.
The aversion to nationalisation was eventually outweighed by fright at the idea of doing a deal which might hand a windfall to Branson of billions of pounds. That would set them up for a terrible hammering from both the Opposition parties and Labour MPs. ‘The conditions got worse and worse and worse,’ Darling later reflected. ‘You just couldn’t sell a bank at that time. The people who were interested were offering to take it off our hands at a fraction of what it was worth.’15
He told Brown: ‘There’s no way I can stand up in the House of Commons and justify selling the bank to a private sector buyer in these conditions.’ Darling feared he would be ‘lynched’.16
By mid-February, they finally concluded that nationalisation – the course they had been least keen on – was their only realistic option. The Chancellor phoned the news to a disgruntled Branson.17 He and Brown then spent that Sunday lunchtime discussing how the Chancellor would present it at a hurriedly arranged news conference that afternoon. Brown pressed for Darling to emphasise that it would not be like the nationalisations of old. The Chancellor told the reporters summoned to the Treasury that the Government would be an ‘arm’s length’ owner, not interfering in the day-to-day management, with a view to returning it to the private sector as soon as possible.18
It had taken five tortuous months to get there. For a long time afterwards, Treasury officials at the heart of the process were still shuddering over ‘the horror of Northern Rock’.19 It presented the Government with one of those nasty political dilemmas where the choice is between the unpalatable and the unappetising. Letting the damaged bank go bankrupt would have cost the taxpayer an estimated £7 billion.20 That would also have been a major blow in Labour’s north-eastern heartland. In fragile financial markets, there was no private buyer willing to make rapid repayment of the loans from the taxpayer. All the bidders wanted the Treasury to underwrite them for a long time, allowing a new owner to profit from any upside while the taxpayer bore the risk of the downside. This left nationalisation as the lesser of evils.
For both political reasons and to protect the Government against any legal action by shareholders, they felt they had to exhaust the search for a private sector rescue before they went for public ownership.21 But the time it took to get there was taken as confirmatory evidence that Brown’s Government was characterised by dither.
At least the nationalisation, when it was finally decided upon, was quick. In the week after Darling’s announcement, and with the co-operation of the Opposition, the legislation taking the bank into public ownership was sped through the Commons. When it passed its final stages late on the night of Thursday, 21 February, some old comrades on the Labour benches sang a chorus of the ‘Red Flag’. They were being ironic: they knew the Government had not acted out of a sudden conversion to command economy socialism, but because there was simply no alternative.22
The failure to find a private sector buyer rang alarm bells deep within the Government. It was this saga that began to open their eyes to the precariousness of the entire banking system. In April, Brown summoned the chiefs of the major banks to a breakfast at Number 10. The bankers were insistent that the problem was market liquidity not their balance sheets. ‘But what about your losses?’ asked the Prime Minister. ‘What about capital?’ Afterwards, he expressed his frustration to Yvette Cooper and Shriti Vadera. ‘Why are the bank executives not admitting their losses?’ Vadera, who knew the City, responded: ‘They don’t want to admit it, because they’ll be fired.’23
Northern Rock had a reasonably ‘good book’ of mortgages, 2 million customers and a large presence in the high street. In normal times, it ought to have been an attractive purchase for one of the other banks, especially when the Government was on bended knee to find a buyer. When no other big institution was prepared to make an offer for it, even on terms whose generosity reflected the Government’s desperation not to nationalise, Alistair Darling and his senior civil servants concluded that this had to be because the finances of the other banks were in a much worse state than they were publicly admitting. In the words of one of those officials: ‘When none of them would buy Northern Rock, our view of the world changed. It was then that we began to realise that things must be very bad indeed.’24 Darling began to fear that the Rock was ‘the tip of a very nasty iceberg’.25
The Chancellor came into the Treasury one Monday morning to tell his officials that he had been in his local supermarket in Edinburgh at the weekend and overheard two elderly shoppers talking about the ‘sub-prime crisis’. That was one of many signs that the credit crunch was beginning to bite on real voters. Mortgages became much harder to come by and the terms demanded were much stricter than during the bubble years. Property prices began to fall at the fastest rate since the crash of the early 1990s.26 Repossession rates were rising, retail sales were falling, consumer confidence was slumping and increasing numbers of businesses issued profit warnings.
There was another distress signal from the world’s unstable financial system in mid-March. Bear Stearns, America’s fifth-largest bank, collapsed into the arms of JP Morgan for the fire sale price of $2 a share. Mervyn King was becoming so anxious that he was getting over his earlier preoccupation with moral hazard. The Governor was ‘very badly scarred by his late reaction to Northern Rock’.27 He set up a new ‘special liquidity scheme’ to allow British banks to swap mortgage-backed securities for Treasury bonds.
Darling presented what he called a ‘stability Budget’. The dull title endeavoured to make a virtue of the fact that it was a do-little Budget because his room for manoeuvre was cramped by lack of money and the mistakes made the previous autumn. He dutifully rehearsed Brown’s line that ‘Britain is better placed than other economies to withstand the slowdown in the global economy.’28 Darling lowered the Treasury’s previous forecasts for growth, though the Government’s claims for the outlook were still far too optimistic in the view of many analysts who could see the storm clouds massing on the horizon.
There had been a mild recovery in Labour’s opinion poll rating before the Budget. Afterwards, the trend reversed and the Tories began to stretch the
ir advantage. John McFall explains: ‘There was nothing that shone out of the Budget for people.’29 The fault did not lie with any particular measure announced by Darling. It was the overall impact of a gloomy Budget which concentrated voters’ minds on the deteriorating state of the economy and crystallised fears about their livelihoods. ‘Labour’s vote went over the cliff.’30
Further tension was twisted into the relationship between Numbers 10 and 11 as Brown’s acolytes blamed Darling for being undynamic and downbeat. Brown was especially furious when increases to car tax attracted a bad press. The Prime Minister raged to his aides that the Chancellor hadn’t warned him, an exquisitely ironic complaint when for years he had concealed the contents of Budgets from Tony Blair. ‘It was a very bad patch with Darling.’31 Brown complained that Darling was failing to establish himself as a strong figure in the City or the country. There was some truth in this, but whose fault was it when he was constantly second-guessed by his next-door neighbour? There was a growing rumble from within Number 10 that the Government needed a bold and aggressive Chancellor who would take the fight to the Tories. The corridors of Whitehall began to whisper with suggestions that he would be replaced at the Treasury by Ed Balls, Brown’s first choice.
Yet it was not Darling’s first Budget that posed the most significant risk to the Government in the spring of 2008. The truly explosive danger lay in Brown’s final Budget the year before, the one in which he abolished the 10p income tax band to finance a headline-chasing cut in the basic rate from 22p to 20p. That finale to his Chancellorship was designed to impress Labour MPs with his cleverness and prove to the right-wing press that he could be as friendly to Middle Britain as Tony Blair. Brown had done this at the cost of planting a time bomb under his own premiership which was now about to detonate.
He had been dismissive of the red flags raised by those who spotted that this tax change was going to hit many of the less well-off when they had to start paying tax at 20 rather than 10 per cent. When Alistair Darling first arrived at the Treasury, his officials briefed the new Chancellor about the consequences of the tax change and gave him the same warnings they had delivered to Brown before he scrapped the 10p band.32 As Darling later revealed to me: ‘I became Chancellor and you “open the books”, if you like, and you say: “Look, what are the problems we’re facing?” I knew this was a problem.’33
More than 5 million people would be potentially worse off when the 10p band disappeared at the beginning of the new tax year on 6 April. Darling raised the issue with Brown in the months beforehand, but the Prime Minister pushed him away. The difficulties were minor, Brown argued, and they could be fixed by tweaking tax credits to compensate the losers. So the chance to defuse this bomb was not taken in the March Budget. Alistair Darling never tried to pretend that some people would not lose out, though the Chancellor could not publicly call it a mistake, because it was his next-door neighbour’s mistake. Gordon Brown, in the words of one senior member of the Cabinet, remained ‘in denial’.34
At his worst, Brown’s decision-making process was almost endless prevarication followed by almost absolute inflexibility. That was to be his undoing over the 10p tax rate. The vast majority of Labour MPs voted for the tax change the previous year, but by the spring of 2008 they were suddenly alert to what it meant for many of their least affluent constituents. By late March, with days to go before the change began to eat into the pay packets of low earners and payments to poorer pensioners, backbenchers were in a highly agitated state. They were waking up to the fact that an already unpopular Government was about to take money out of the pockets of millions of the less well-off.
On Monday, 31 March, the mood among Labour MPs was restless when they crowded into committee room 14 at the Commons to hear the Prime Minister. Nia Griffith, the Labour MP for Llanelli and a backbencher regarded as a loyalist, told him that it was going to hit the less well-off in her constituency. Eric Martlew, the MP for Carlisle, added that he’d had complaints about the tax change at his weekend surgery. Other MPs, who were having similar experiences, murmured agreement.35
Brown entirely failed to read the mood of the meeting. ‘That’s wrong,’ he insisted. ‘No-one is going to lose out.’ This was met with a rumble of disbelief and some cries of dissent from Labour MPs. According to one very Brownite MP present: ‘There was a stunned realisation: “this man doesn’t know what he is talking about.” It was like a light came on in everyone’s head: “this man isn’t living in the real world.” ’36
Brown was shocked and bewildered by the sulphurous response from his MPs. He put up his hands and lamely asked them to write to him with suggestions, a spectacle which some present found pitiful.37
A week later, the Labour-dominated Treasury select committee joined the fray by confirming that the abolition of the 10p rate would leave many low-income households worse off. It criticised the Government for failing to address the problem in the most recent Budget.38 John McFall, the Labour chairman, had grasped many months previously that the 10p tax change was a potential disaster. As the furore intensified, he went to see Brown to try to persuade him he had to shift. ‘What were you thinking of Gordon?’ asked McFall, telling him something had to be done. ‘Listen, John, I’m trying,’ responded Brown. ‘Don’t you think I’m fucking trying?’39
Michael Wills, a minister who had been close to Brown for years, also warned him that he was in serious trouble after constituents in Swindon came to him with their payslips to show how they were going to lose out.40 Nick Brown went so far as to compare the intensity of the feeling among Labour MPs with the revolt against the Iraq War.41 David Cameron, whose party had originally supported abolition of the band, saw a chance to pose as a friend of the poor. Nick Clegg, the newly elected leader of the Lib Dems, spoke from higher moral ground because his party consistently opposed the abolition of the 10p band. Frank Field, who had been ignored when he tried to alert colleagues to Brown’s mistake a year before, claimed the status of the wise seer who had seen this disaster coming.
Despite the warnings of his friends and a growing coalition of dangerous opposition, Brown was still hugely reluctant to budge. The Scottish word ‘thrawn’, meaning an especially mulish form of stubbornness, might have been invented for him. According to one of his senior aides: ‘It was a mixture of not wanting to admit a mistake and genuinely believing he had done the right thing and the Treasury saying there was no money.’42 Brown had never been permeable to other views once he had made up his mind about something. He found it especially hard to accept that he had got this wrong because it collided so completely with his concept of himself as the friend of the disadvantaged. ‘The trouble with Gordon is that he creates his own reality,’ sighed one Cabinet colleague.43 Even as this freight train of trouble bore down on him, he tied himself even more tightly to the railway tracks.
His core belief, central selling point and authenticating value was supposed to be his concern for the poor. This issue raised large questions over both his judgement and his character. ‘The emperor has no clothes, the box of secrets is empty,’ wept Polly Toynbee of the Guardian, previously an enthusiast for Brown. She despaired: ‘The 10p tax fiasco is serious: in one iconic error Brown has blown away his most admirable reputation – a ten year record of directing money to the poorest. This does inestimable harm.’44
Even Government office holders, including aides to some of his closest allies in the Cabinet, were in open rebellion. When Brown flew out to meet George Bush in the second half of April, the furies pursued the Prime Minister across the Atlantic. Reports reached him that Angela Smith, the parliamentary aide to Yvette Cooper, the Chief Treasury Secretary, was on the edge of resignation. From Washington, the Prime Minister had to make a phone call to persuade her not to quit. That vignette captured the dreadful pass he had come to: forced to interrupt his international schedule to make a pleading phone call back home to forestall the resignation of a Parliamentary Private Secretary.
The trip to the United States
was ill-starred in other respects. It was badly scheduled, clashing with the arrival of Pope Benedict XVI, the first Pope to visit the White House in nearly thirty years and a figure who captured the attention of the US media much more than the British Prime Minister. It was apparent that few Americans knew anything about Gordon Brown, except that he was not Tony Blair. ‘Who’s that man?’ asked a photo caption on the popular American website The Drudge Report. CBS felt the necessity to introduce an interview with Brown by telling its viewers: ‘He’s known as the stern Scotsman who rarely smiles.’45 During an awkward encounter with Diane Sawyer, the queen of American breakfast television, Brown found himself forced to talk about his predecessor as the only way to get Americans to take much interest in him.46
The furore about 10p tax was significant in itself and symbolic of Brown’s wider problems. It prompted unflattering comparisons between his tin ear for trouble and clumsy handling of a crisis with his predecessor’s sharp antennae and deft touch. Lord Desai, a professor at the LSE and Labour peer, told an interviewer that ‘Gordon Brown was put on Earth to remind people how good Tony Blair was’ and described Brown’s leadership style as ‘porridge or maybe haggis’ compared with Blair’s ‘champagne’.47
It was entirely predictable that there would be nostalgia for Tony Blair, and forgetfulness that he too had become very unpopular, once Gordon Brown ran into serious difficulty. Yet it was not just his enemies but also his erstwhile admirers who pointed to the Prime Minister’s paucity of communications skills. As he became ever more unpopular, it was the routine lament of his friends that the attractive side of him which was sometimes on display in private was never conveyed to the public. To Mariella Frostrup, he was ‘much warmer and funnier and nicer than you imagine’ as well as a person of ‘incredibly noble intentions’.48 Vince Cable thought the private Brown ‘has a nice sense of humour, a pleasant chuckle, which doesn’t really come across publicly’.49