Osborne has his most challenging Budget to prepare to date, which he is to deliver on 20 March. He is acutely aware he has to avoid anything that could be turned into a debacle as in 2012, or ‘the game will be up’.6 His take is that the Budget unravelled in 2012 because the well-off were perceived as being subsidised by everybody else, which seemed patently unjust. The 2013 Budget must thus above all be seen to be fair: if it can be, the continuing punishment may seem to be reasonable. He gives forensic attention to every twist and turn in the budgetary process. Cameron’s team at Number 10 learn their mistake of 2012: they too are going to be intimately involved at every stage. ‘The Treasury are constantly showing us stuff. Each option they present, we think through and assess the political consequences,’ says one of them. This process weeds out some ideas, including for a penny to be cut off the top rate of income tax, about which Number 10 firmly puts its foot down, not least because it is unaffordable. ‘We had to root out anything that would come back and hit us in the face,’ says another of Cameron’s team, revealing a degree of anxiety about what Osborne might spring on them. ‘It’s obviously George’s Budget, and he’s a natural showman: that’s part of his appeal. He loves to have something in each Budget that he can pull out of the bag. What we have to do is to make the size of the rabbit smaller, and dampen it down.’ Osborne feels his team is working in the dark, against the backdrop of not knowing what the GDP numbers will be for Q1 in 2013. ‘We didn’t know if it would be a triple dip. It was not easy,’ says an aide. Osborne knows there is only one question that will be asked about the Budget: ‘What has it done to get the economy moving?’ What no one knows (but what Rupert Harrison has predicted) is that the economy is already beginning to motor.
Osborne’s and Cameron’s team are happy with the proposals, so they go to the Quad to run them past Nick Clegg and Danny Alexander. ‘I’m very conscious I’m the first chancellor in modern history to have to negotiate my Budgets with another political party,’ said Osborne. For all the closeness of Osborne’s personal relationship with Alexander, his chief secretary remains a Lib Dem, and that is a constraint, and not always a welcome one.7 For the third consecutive Budget the Lib Dems press particularly hard for the personal allowance to be increased (to £10,000 from 2014, brought forward from 2015). Coalition rivalry runs high over the ownership of this: it is a Lib Dem policy, though one that the Conservatives have become increasingly happy to champion.8
Osborne lacks scope for a big initiative in the Budget. So this most political of chancellors makes it one of his most political to date, aiming it at voters who ‘do the right thing’.9 To counter rising Labour attacks on the fall in living standards since 2010, Osborne freezes petrol duty (to be precise, he cancels an increase of fuel duty planned for September). To please his own backbenchers, he cuts beer duty. Mindful of protecting the government’s credibility with financial markets following his decision the previous autumn to delay the fulfilment of his cuts programme, he announces a further 1% cut in many government departments, though not in Health or Education. Corporation tax is reduced in line with his long-term aim of cutting tax and increasing the attractiveness of the UK to inward investment. National Insurance is cut to boost employment: 450,000 small businesses will pay no employer National Insurance contributions. A consultation on the introduction of a new tax relief to encourage investment in social enterprises is announced. Tax incentives are announced for vehicles with ultra-low emissions, and for investment in shale gas. The centrepiece of the Budget is the ‘Help to Buy’ scheme, one of the more overtly political moves. The scheme offers equity loans and mortgage guarantees to borrowers purchasing new-build homes. Osborne sidesteps the charge that he is stoking a new housing bubble by resorting to the Thatcherite argument that he is helping spread ownership, particularly to first-time buyers. The economy will grow by 0.6% in 2013, he predicts, albeit half the rate he forecast three months earlier.
Ed Miliband senses that he has Osborne on the ropes. ‘We have had the slowest recovery for a hundred years … It is a downgraded Budget from a downgraded chancellor.’ He taunts Osborne’s use of Twitter, saying he could have summarised his Budget in 140 characters: ‘Growth down. Borrowing up. Families hit. And millionaires laughing all the way to the bank. #downgradedchancellor.’10 Labour’s punches leave their mark. Osborne is relieved that the Budget is nevertheless better received than he and Cameron had feared. ‘The Laddie’s Not For Turning!’ is the headline in the Daily Mail, while The Times goes for ‘Betting the house: Mortgage giveaway and tax cuts at heart of the Budget’ and ‘Osborne goes for growth’, and the Daily Telegraph has ‘Osborne pins hopes on housing boom’.11 For a time, it seems that Osborne has got away with it. But fresh woes lie ahead.
On 16 April, IMF chief economist Olivier Blanchard says that Osborne is ‘playing with fire’ with his fiscal policy. He openly criticises the Budget for failing to change the austerity strategy. ‘I think conditions have deteriorated. There is no question that the fiscal plan – which was designed a few years back – was assuming that private demand would be stronger than it is.’12 Blanchard‘s words are bad enough, but worse follows just two days later when the respected and trusted Christine Lagarde, head of the IMF, says the poor performance of the British economy has left her with no alternative but to call on Osborne to rethink his austerity strategy.13 A few very bleak days follow.
Osborne knows he is still in a fight for his political survival. Looking at a new monetary policy remit is one avenue he has been exploring for several months. In February 2013, he had sent Harrison with Treasury economist Andy King (later head of staff at the Office for Budget Responsibility) to the East Coast of the US to talk to economists and investors about a new framework for Britain. They met Janet Yellen, a member of the US Federal Reserve, and became increasingly attracted to the idea of ‘forward guidance’, which the US practised, whereby the central bank makes a long-term commitment on interest rates as long as certain criteria, such as the rate of unemployment, are fulfilled. On their return, they wrote a paper advocating the adoption of it in the UK.
Osborne’s critical eye turns to the Treasury. He remains very happy with Nicholas Macpherson at its head, and thinks that the machine is doing an effective job at putting the Budgets together and controlling public expenditure. But he is less impressed by the private-sector-facing part of the Treasury, and with its record on innovation, specifically generating growth. (This long-standing frustration explains the appointment of Paul Kirby as head of the Number 10 Policy Unit back in spring 2011.) Osborne also worries about the Treasury’s reliance on experienced hand Tom Scholar, who is sans pareil in his grasp of banks, regulators and financial services. In November 2013, Scholar is appointed head of the European and Global Issues Secretariat, which, Osborne believes, leaves a gaping hole. He worries that no existing Treasury officials have the skills needed, so he makes two external appointments. One is to bring back John Kingman, who had become the first CEO of UK Financial Investments in November 2008 before joining Rothschilds in 2010: he provides a strong lead on banks, the private sector and growth policy. Charles Roxburgh is the other hire in February 2013 as director general of financial services, who joins from McKinsey.
Osborne prides himself on his eye for a good appointment. Paul Deighton, who succeeds James Sassoon as Commercial Secretary at the Treasury in January 2013, is another example. Deighton had been an investment banker before coming to public prominence as a notably successful CEO of the London Organising Committee of the Olympic and Paralympic Games. These changes in personnel at the Treasury help inject new impetus.
But Osborne’s most important hire of all sees him at his most persuasive. For Osborne there are three vital people he needs to consult and keep onside, and he invests great attention on all of them: the prime minister, the Treasury permanent secretary (Macpherson), and the governor of the Bank of England (Mervyn King). Osborne has had a good relationship overall with King, governor since 2003, whom he regards as a
mentor, but during 2011 and 2012, he becomes frustrated with King’s almost fatalistic approach to banks and credit. King tells Osborne he thinks the eurozone will almost inevitably break up, and the banks need to be strong enough to withstand the shock.
Osborne has attacked the Financial Services Authority, part of the Brown legacy, although he cannot attack the Bank itself as it is widely accepted that the monetary policy apparatus he inherited is working well. But for King’s successor, he wants someone who will signal change and resolve. The search for a successor begins in early 2012. Paul Tucker is the leading candidate inside the Bank, though John Vickers and Howard Davies are higher up the list of potential candidates. But Tucker was never seen as the candidate who would introduce the radical change they wanted. Osborne has encountered Mark Carney, governor of the Bank of Canada since 2008, on many occasions at international monetary and financial forums, and likes him. Carney’s name is head of the list of possibles, but is he only a ‘dream candidate’? Much discussion takes place over whether it would be acceptable to appoint a Canadian, who would be the first foreigner to become governor in the Bank’s 319-year history.
Osborne had been first introduced to Carney by James Sassoon, and formed a high opinion of Carney’s skill as a central banker. A graduate of Harvard and Oxford, Carney had worked at Goldman Sachs, and as governor of the Bank of Canada, the country had been the only G8 nation not to bail out its banks. Unlike in other countries, lending in Canada had not got out of hand and there had been no artificial housing boom. Osborne says whereas King is instinctively cautious, Carney is far more open to the idea of using ‘unconventional monetary instruments’ in addition to quantitative easing to stimulate the economy.14 Osborne first raises the vacancy with Carney off-piste from the G20 in Los Cabos in Mexico on 18–19 June 2012. Beth Russell, Osborne’s private secretary, is tasked with finding an obscure location in the ‘middle of nowhere’, so he can lobby Carney without arousing any suspicion, and comes up with a Japanese restaurant. The media nevertheless get wind of it, and in August, Carney is asked if he would take up the post. He says no.15 The appointment continues to be discussed among a very tight group, extending no further than Osborne and Cameron, Llewellyn and Harrison, and Macpherson. In September, Osborne calls Carney, ostensibly to hear his thoughts on a list of candidates, though Osborne lobs in: ‘You know, you’re still my guy. You’re still top of my list. Will you think about it again and tell us what you need?’ Osborne always had an instinct Carney wanted to do it, but personal factors are a block. Key to his eventual acceptance is the agreement that he serve just five years rather than the customary ten.
By the autumn of 2012, Carney’s appointment is finalised, and it is announced on 26 November 2012. Osborne had been consulting Carney regularly about forward guidance, on which Carney is an enthusiast. Osborne announces in the March 2013 Budget that the Bank will set a new remit for the Monetary Policy Committee (MPC) in an effort to stimulate the economy. Then in August, the Bank formally announces forward guidance, saying the MPC will not raise the bank rate from its current level of 0.5%, and will be ready to undertake further asset purchases, as long as unemployment remains above 7%.16 Osborne and Harrison had wanted the MPC to agree to a 6.5% unemployment figure, but the MPC were not unanimous. The publication of the new remit, alongside Carney’s appointment, sends a powerful message to business and the markets that the government is deadly clear about getting the economy moving again.
On 25 April, the Office for National Statistics (ONS) publishes the Q1 figures for 2013. They show that GDP increased by 0.3% compared with Q4 in 2012, with the largest contribution coming from services.17 Cameron happens to be with Osborne and Harrison when the figures come through. Harrison hands his Blackberry to the PM, who pumps his fist into the air. Two months later, the ONS also revises its figures for 2012, showing the UK had just managed to avert a double-dip recession.18 Suddenly, the pressure is easing. It looks like Plan A may have paid off after all. In the Queen’s Speech in May, Cameron calms nerves with an upbeat speech promising further measures to boost economic growth. On 19 June, Osborne delivers a positive Mansion House speech, one year on from the announcement of Funding for Lending. He tells the audience the economic news has been ‘better in recent months’, although ‘while Britain has left intensive care, we still need to secure the recovery’. This is not the time for faint hearts, he says. There will be no change to the government’s central strategy, and no wavering in its ‘determination to put right what went so badly wrong’. But he is not opposed to all innovation. The government is to sell off the taxpayer’s 39% stake in the Lloyds Banking Group, and he raises the possibility of the break-up of RBS. ‘Nothing signals better Britain’s move from rescue to recovery’, he says, than planning to exit from government ownership of the biggest banks.19
Mario Draghi, European Central Bank president, who in July 2012 had arguably saved the euro when proclaiming he would do ‘whatever it takes’ to stand behind the currency, is meanwhile continuing to be optimistic about the future of the eurozone, further reducing anxiety in the financial markets. The Spending Round in June 2013 announces £11.5 billion of cuts to come and freezes public sector pay rises to 1%, but passes through relatively smoothly. On 25 July, the ONS give their preliminary estimate of Q2, which shows that GDP has increased by 0.6% on Q1.20 The figures are revised upwards in August, adding still further to confidence.21 It is now official. Not only did the double dip in 2012 never happen, but the much feared triple dip has been avoided.
That summer, the sense of optimism in Number 10 is palpable. The bleakness of the economic data in the preceding months has been replaced by much more encouraging news. The economy may have been flat in 2012, and the original downturn after the crisis in 2008 is shown to have been deeper than feared at the time, but UK PLC is finally emerging from the gloom. Miliband is under pressure from senior figures in his party, including Alistair Darling.22 Osborne goes off to the US on his summer holiday, with the weight lifting from his shoulders. The mood is bolstered further when, in October, the IMF officially drops its criticism of Osborne. In October 2013, Blanchard is reported in the Financial Times as saying he is ‘pleasantly surprised’ by the UK’s economic growth.23 In June 2014, after the ONS Q4 2013 second estimate shows GDP up 0.7% on Q3 and up 1.8% for the whole year, Lagarde says that ‘At the IMF, we have learnt that there is no single best way to reduce the fiscal deficit,’ and admits ‘We clearly underestimated the growth of the UK economy in our forecast a year ago.’24 After Osborne’s long night, dawn lies ahead.
TWENTY-SIX
The Iron Lady’s Long Shadow
April 2013
Monday 8 April 2013 is scheduled to be an unusually busy day for the PM. Cameron is in the Moncloa Palace in Madrid, settling down for lunch with Mariano Rajoy, Spain’s conservative prime minister. ‘The visit has been ring-fenced in the diary; a British premier has not been to Madrid for several years.’ Later that day, he is due to fly to Paris to see French president François Hollande. Then he will be whisked back to the UK for a three-day tour of the Midlands, Cornwall and the North-West, to drum up support ahead of the local elections.1 But the plans are about to be ripped up. At 11 a.m. London time, in a suite in the Ritz hotel, Margaret Thatcher dies at the age of eighty-seven.
From December 2012, information had begun to flow into Number 10 that Lady Thatcher was not well, and a telephone tree procedure had been put in place in preparation for her demise. At 11.45, Julian Seymour, the former director of Thatcher’s Private Office, calls Chris Martin at Number 10 to tell him the news. Martin had been looking forward to Cameron’s absence as a chance to catch up, but Number 10 immediately explodes into life. Craig Oliver calls Cameron’s team in Madrid. ‘Look, Baroness Thatcher has died. We need to get words out from the PM, very clearly. We need him back here very quickly.’ Ed Llewellyn is at the lunch in the Moncloa Palace and receives a text with the news as they are sitting down. He decides that they should remain for the r
est of the meal, but fly back to the UK immediately afterwards. A draft statement has already been prepared for the occasion. As they leave the palace, the statement from London is handed to Cameron: ‘It was with great sadness that l learned of Lady Thatcher’s death,’ he tells the assembled cameras. ‘We’ve lost a great leader, a great prime minister and a great Briton.’2
Hollande must be stood up. Sensitive conversations are held with the Elysée Palace explaining why the PM must return immediately to London. While Cameron’s plane hurries back from Madrid, Cameron and his team agree the text of the statement he will deliver. As Llewellyn finalises the text, Oliver talks to the BBC about filming Cameron’s statement outside Number 10. Wearing a black tie, he delivers the agreed words: ‘Margaret Thatcher didn’t just lead our country; she saved our country … She was the shopkeeper’s daughter from Grantham who made it all the way to the highest office in the land … If there is one thing that cuts through all of this, one thing that runs through everything that she did, it was her lionhearted love of this country. She was the patriot prime minister.’
Cameron’s team are happy that the statement demonstrates to the nation that he understands the full significance of this moment in British history. They have to fight against an institutional inertia in Whitehall: ‘The system wants you to slightly undercook things,’ says one, ‘but too much is at stake. It was a major moment and we needed to demonstrate that as a Conservative, the PM understood the scale of it,’ says an aide. The three-day regional tour is promptly cancelled.
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