For the Record. David Cameron
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to prove fatal, as we were later to clash over the European Court of Human Rights. These tensions paved the way for Theresa May. One of the reasons I thought she’d make a great home secretary was that we agreed on these issues and many more.
All my woes during the beginning of Gordon Brown’s premiership were about to pale, however, as two meteorites hit British politics in quick succession: the financial crash and the MPs’ expenses scandal. Both would shake people’s faith in the establishment, shape politics – and in the case of the crash have a huge impact on people’s lives for many years to come.
Brown was right to say that the economic crisis ‘started in America’, because it was there that subprime mortgage lenders had been providing credit to people who hadn’t a hope of paying the money back. Other financial institutions sliced and diced these loans into toxic bonds that were bought worldwide as investors searched for high yields.
And, of course, it was in 2008 that American investment bank Lehman Brothers fell, dragging the world’s financial markets down with it. But it was a crisis to which Britain was particularly exposed. Our lending and banking practices had been infected with similar over-exuberance. One of our largest mortgage lenders, Northern Rock, was among the first victims of the credit crunch, and faced collapse in 2007. Our banks were some of the most over-leveraged (indeed, the later bailout of the Royal Bank of Scotland remains the biggest rescue of a bank ever). And – absolutely crucially – our economy was built on a mountain of debt. Not just private sector debt, but rising government debt from an administration that hadn’t adequately used the good years to run surpluses and pay down debt.
So yes, the fire began in America. But Britain had been piling up kindling for many years.
Being the opposition party at this moment left us with a difficult balancing act. Hold the government to account, but don’t damage the national interest. Support the government in its necessary action, but make sure you don’t become an irrelevant echo. Think through the policies needed for the future in a way that convinces people, while avoiding populist kneejerks. An additional complication was that we were the party that had championed the deregulation that some were arguing had allowed the bad banking practices to take place. We were up against a prime minister who had been chancellor for a decade, and who believed he understood the complexities of the international financial system better than anyone.
And then there was the most difficult thing. We had agreed – and announced back in September 2007 – to match Labour’s public spending plans.
Governments determine the base line of arguments about tax and spending. If you depart from it, you end up vulnerable (as we had been in 2001 and 2005) to being described as vicious cutters or, as in Labour’s case, big taxers.
Labour had solved that problem in 1997 by offering voters a period of stability in which they would match our plans. After that, all bets were off. We had been critical in the 2005 election of Labour’s borrowing and spending, and remained critical, but we had lost the argument. We had had to make a decision when a possible 2007 election loomed, and had decided to use Labour’s 1997 technique. We would match their plans for a couple of years, allowing us the freedom to impose better control after that.
In the light of the 2008 crash, this was clearly a policy mistake, if not a political one, and we needed to change our approach. So we tried to do three things in framing our response.
First, we would be constructive. As Her Majesty’s Loyal Opposition, moments of national crisis demand that you put the emphasis on the word ‘loyal’. Over in America we were seeing the damage that could be caused by political wrangling, with the rejection by Congress on 29 September 2008 of the Troubled Asset Relief Program. It sent the markets into free fall.
I was in Birmingham at our party conference, and decided to make an emergency statement on the penultimate day. In that, and in my main speech on the final day, I struck a constructive tone. Not only should we be working with the government, but with the financial services industry. I knew instinctively that this was what was needed to meet our short-term priority: preventing a rapid banking collapse and thereby protecting people’s jobs, homes and businesses. And I knew it was necessary to meet our long-term aim: fixing the free enterprise system so that never again could it inflict this damage.
That’s why we supported Brown’s plans for the recapitalisation of the banks, for example when the government bought 58 per cent of RBS in November 2008. There was a strong argument for stripping the most damaged assets out of the banks and creating a ‘Bad Bank’, as other countries had done in previous crises, but ultimately we backed the injection of public funds to prevent their collapse.
Second, we took our time. We formed a council of advisers, comprising former banking chiefs, top civil servants, Conservative chancellors and others, to guide our approach. Sir Brian Pitman, former head of Lloyds Bank, who I had got to know when I was at Carlton, was a regular visitor. Terry Burns, former Treasury permanent secretary, was key, as was Ken Clarke, who we soon brought back into the fold as shadow business secretary.
They were unanimous that, while it felt as if we were facing a totally new and potentially terrifying set of economic circumstances, there were lessons to learn from history. The Wall Street Crash hadn’t caused the Great Depression, it was the banking crisis that came after it, and the policy response to that crisis, which let bank after bank close, taking with them savings, credit and any chance of recovery.
Those who argued that all we needed was tighter financial controls and more government spending were wrong: this was a monetary crisis, and the most important part of the solution was monetary action: flooding the system with liquidity, preventing the collapse of systemic financial institutions, establishing new sources of finance – government ones, if necessary – to lend money to small businesses now starved of cash.
Confident of this analysis, the third thing we had to do was to be bold. In November 2008, we announced that we would move away from Labour’s spending plans. Championing prudence was particularly brave at a time when the whole world was fixated on a Keynesian ‘spend, spend, spend’ solution to the crash. But we genuinely believed that the government’s fiscal position was so precarious that it could not afford to go beyond the ‘automatic stabilisers’ of higher benefit bills and lower tax receipts that in any event push up the budget deficit when the economy stops growing.
Discretionary increases in government spending and tax cuts were all right for those countries that could afford them; those that couldn’t were playing with fire. So, in another bold step – particularly for a party that prided itself on supporting low taxes – when Labour announced a temporary cut in VAT, we voted against it.
The real boldness, however, was in directly advocating a policy of austerity in terms of cutting government spending for the future. After all, what party goes into a general election talking about cuts? And we were using that crucial word: cuts.
This caused more trouble for Gordon Brown, who, after having mistakenly declared himself to have ended the b-words – boom and bust – simply refused for weeks and weeks to use the c-word.
Some critics say that we were as naïve as Brown – and that we never saw the bust coming. But it was before the crunch and crash that I’d given a speech at KPMG warning about Labour’s unsustainable deficit and debt. We knew their overspending would come to bear on us all. We knew the economy was built on sand. We just didn’t know the meteorite would hit when it did.
Other critics say that we were desperate to cut public spending in order to dismantle public services. Well, since we’d promised in 2007 to match Labour’s spending plans, clearly that wasn’t the case. The reality was, in the phrase George coined and then made famous through endless repetition, they hadn’t fixed the roof when the sun was shining.
The reason for cutting was therefore the total opposite. It was to save public services. The greater the debt, the more money we would be spending on repayments. The weaker the economy, the less to spend on public services. We saw this clear as day, and I suspected that working people would see it too. They knew the UK hadn’t been living within